SEBI made fund houses show riskometer for the benchmark too - most investors never check it

On 31 August 2021, SEBI issued circular SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/621, titled "Disclosure of risk-o-meter of scheme, benchmark and portfolio details to the investors", through its Investment Management Department (IMD-II DOF3). The circular did something quietly radical: it stopped letting a fund be labelled in isolation. From then on, every mutual fund scheme had to display the risk-o-meter of its own benchmark index right next to its own risk-o-meter, so that a reader could see at a glance whether the fund was carrying more risk than the yardstick it claims to beat.

Four years on, the disclosure sits on every factsheet and most investors still never read the second dial. The scheme risk-o-meter and the benchmark risk-o-meter are two different instruments answering two different questions, and the gap between them is one of the cheapest risk signals available to a retail investor — it costs nothing and updates every month. This piece compares the two dials, explains how to use the divergence to spot concentrated or off-benchmark bets, and sets out how the gains are taxed once you act on what you find.

The underlying machinery came from an earlier order. SEBI circular SEBI/HO/IMD/DF3/CIR/P/2020/197, dated 5 October 2020, introduced the modern six-level risk-o-meter computed from a scheme's actual portfolio rather than from a static product-label category. The August 2021 circular extended that framework in two directions at once: it added the benchmark's risk-o-meter and it mandated fuller underlying-portfolio disclosure, giving investors the raw material to check the label against the holdings.

Side-by-Side Comparison: Scheme Riskometer vs Benchmark Riskometer

The two dials look identical — the same six-step gauge running from Low to Very High — but they measure different objects. The scheme risk-o-meter is computed from the fund's own portfolio as it stands. The benchmark risk-o-meter is computed from the index the fund is measured against, such as the Nifty 50 TRI or the Nifty Midcap 150 TRI. Comparing a fund with its benchmark index is the whole point of the August 2021 disclosure.

Both dials use the identical six-level scale defined in the October 2020 circular. Each level is a verdict on the portfolio as a whole, not on any single holding, and the position is reviewed every month.

The readings above are indicative, because the dial follows the live portfolio rather than the fund's name. Under the October 2020 framework the risk-o-meter is evaluated on a monthly basis and disclosed within 10 days of the close of each month, and any change in the reading must be communicated to existing unitholders through a notice-cum-addendum and by email or SMS. That monthly cadence is why the comparison is worth repeating: a fund that reads Moderately High in April can drift to Very High by August without changing its name or its stated mandate.

The signal to watch is divergence. If a scheme's dial reads one notch higher than its benchmark's — say the fund shows Very High while its large-cap benchmark shows High — the manager is running more risk than the index, usually through concentration, off-benchmark holdings, lower-quality credit, or a longer duration. That is not automatically bad; it is the source of any alpha the fund hopes to earn. But it is a bet, and the August 2021 disclosure exists so you know you are paying for one. A persistent one-notch gap on a fund sold as a plain index-tracker deserves a hard look at the portfolio statement the same circular made you entitled to. Before you commit fresh money, model the horizon on the SIP calculator or the lumpsum calculator so the risk reading is paired with a realistic return assumption rather than a brochure figure.

The reverse gap matters too. A scheme whose dial sits a notch below its benchmark is holding cash or defensive positions and is unlikely to keep pace in a rising market — a quiet drag that an expense ratio check alone would miss. Neither dial tells you whether the extra or missing risk has been rewarded; for that you still need the return record. What the pair of dials tells you, for free and every month, is where to point the question.

Tax Treatment

Reading the dials is only half the decision. The moment you switch out of a fund that is taking more risk than you want, you trigger a capital-gains event, and the tax depends entirely on what kind of fund it is and how long you held it. For equity-oriented funds — those holding at least 65% in domestic equity — Budget 2024 reset the rates with effect from 23 July 2024.

The long-term exemption is the number most investors forget to use. Under Section 112A, long-term capital gains on equity funds are exempt up to Rs 1,25,000 in a financial year, and only the excess is taxed at 12.5%. That annual threshold, raised from Rs 1,00,000 by Budget 2024, is a per-year allowance, so harvesting gains in instalments across years can keep a rebalancing exercise largely tax-free. Short-term gains on equity funds are taxed at a flat 20% under Section 111A, with no such exemption, which is the clearest arithmetic reason not to churn an equity fund inside twelve months purely on a one-month dial reading.

Debt funds sit under a different and harsher rule. For units of specified mutual funds bought on or after 1 April 2023, the Finance Act 2023 removed the long-term concession entirely: the gain is added to income and taxed at the investor's applicable slab rate, with no indexation and no 12.5% long-term rate, regardless of how long the units are held. A reading on the debt side of the risk-o-meter — a duration or credit bet that has crept up — therefore has to clear a higher tax bar before a switch pays off, because the exit is taxed at your marginal slab rather than at a flat long-term rate.

One point the circular itself does not touch: the risk-o-meter is a disclosure, not tax advice, and the taxing event is the redemption, not the re-labelling. A fund moving from High to Very High does not create a tax liability; selling it does. The sensible order is to read the dials, decide whether the extra risk is wanted, and only then run the holding-period and exemption maths before pressing redeem.

Who Should Pick Which

The scheme-versus-benchmark comparison is not a buy or sell rule on its own; it is a lens, and different investors should point it at different things.

The index-fund buyer should expect the two dials, side by side since the 31 August 2021 circular, to sit at the same level. An index fund or ETF exists to replicate its benchmark, so a scheme dial reading higher than the benchmark dial is a red flag that tracking is loose or the fund is holding something off-index. For this investor the benchmark dial is the control, and any gap of even one of the six levels is a defect to query rather than a feature to admire.

The active-fund investor should expect — and may want — a gap. Paying an active expense ratio only makes sense if the manager takes positions the index does not, which usually shows up as a scheme dial one of the six levels above the benchmark. Here the question is not "why is there a gap" but "has the gap been paid for" — check the divergence against the trailing return record, because a persistent one-notch gap that has not beaten the benchmark since the disclosure began in 2021 is uncompensated risk.

The first-time equity investor using a SIP should treat a Very High scheme dial as a cue to lengthen the horizon, not to retreat to cash. Mid-cap and small-cap funds will almost always read Very High, and that is the nature of the asset class as shown in the benchmark dial too; the right response is a longer holding period that also pushes the gains into the 12.5% long-term bracket rather than the 20% short-term one.

The tax-conscious investor choosing an ELSS fund for Section 80C should remember that the three-year statutory lock-in already forces a long-term holding, so every rupee of gain qualifies for the Section 112A treatment on exit. For this investor the risk-o-meter comparison is about picking between two ELSS options with similar lock-ins — the one whose scheme dial most closely tracks its benchmark is taking less uncompensated risk for the same tax break.

The conservative or near-retirement investor should use the benchmark dial as a floor check. If even the benchmark of a fund being pitched as "safe" reads Moderately High or above on the six-level scale set in the 5 October 2020 circular, the asset class itself is riskier than the label suggests, and no amount of careful fund selection within that category changes the structural reading. Pair the dial with the fund's SEBI category, because the scheme categorisation rules define how much the manager is even allowed to stray.

FAQ

What is the difference between the scheme risk-o-meter and the benchmark risk-o-meter?

The scheme risk-o-meter, introduced by SEBI's circular of 5 October 2020, is calculated from a fund's own live portfolio. The benchmark risk-o-meter, added by the circular of 31 August 2021, is calculated from the index the fund is measured against. Both use the same six-level scale from Low to Very High, and both are updated monthly, so the two dials let you compare the fund's risk directly against its yardstick.

How often is the risk-o-meter updated?

Under the October 2020 framework, the risk-o-meter is evaluated on a monthly basis and disclosed within 10 days of the close of each month. Any change in the reading must be communicated to existing unitholders through a notice-cum-addendum and by email or SMS, which is why a fund's risk level can move during the year even if its name and mandate do not change.

Should I sell a fund if its risk-o-meter reads higher than its benchmark?

Not automatically. A scheme dial a notch above the benchmark dial means the manager is taking more risk than the index, usually through concentration or off-benchmark holdings. For an active fund that may be exactly what you are paying for; for an index fund it is a defect. Check the divergence against the return record first, and remember that selling an equity fund held 12 months or less triggers a flat 20% short-term tax under Section 111A.

How are gains taxed when I switch funds after checking the risk-o-meter?

For equity-oriented funds, long-term gains (holding of more than 12 months) are taxed at 12.5% under Section 112A after an annual exemption of Rs 1,25,000, while short-term gains are taxed at a flat 20% under Section 111A, both with effect from 23 July 2024. For debt funds bought on or after 1 April 2023, the gain is taxed at your slab rate with no long-term concession.

Does a change in the risk-o-meter create a tax liability?

No. The risk-o-meter is a disclosure of portfolio risk, not a transaction. The taxable event is the redemption or switch, not the relabelling. A fund moving from High to Very High does not cost you anything in tax; only selling the units does, and then only on the capital gain.

Where can I see the benchmark risk-o-meter for a fund?

Since the August 2021 circular took effect, the benchmark risk-o-meter must appear alongside the scheme risk-o-meter wherever the scheme dial is shown — on the monthly factsheet, the scheme's page on the AMC website, and in any addendum notifying a change. You can cross-check the benchmark's composition using AMFI's published data at amfiindia.com.

Can the risk-o-meter tell me whether a fund will beat its benchmark?

No. The risk-o-meter measures risk, not return or outperformance. A scheme dial above its benchmark means more risk is being taken, but says nothing about whether that risk has been rewarded. For that you need the fund's trailing returns against the same benchmark over the holding period you intend to invest for.