Risk-Band

Every mutual fund scheme shows its risk on a risk-o-meter with six levels, from Low to Very High. Specialized Investment Funds (SIFs) are a newer product line under the mutual fund regulations, and the workbook says they are riskier than all the other mutual fund schemes.

Putting SIF strategies on the same dial would invite confusion — most would crowd the top end, and an investor could read a SIF and an ordinary scheme at the same level as equally risky. So SEBI gave SIFs their own pictorial meter, called the Risk-Band, with five levels running from level 1 (lowest risk) to level 5 (highest risk).

It is a different scale for a different product. A level on the Risk-Band is not comparable with a level on the risk-o-meter.

Risk-o-meter vs Risk-Band (Chapter 5, section 5.1.6):

The Risk-Band lifecycle:

1. The AMC assigns the risk level at the time of the NFO.
2. The band is evaluated every month.
3. The AMC discloses the risk band for all strategies on its website within 10 days from the close of each month.
4. Any change is communicated by notice-cum-addendum and by email or SMS to unitholders of that strategy.
5. Every year, the AMC discloses each strategy's risk level as on 31 March, with the number of times the level changed during the year, on its own website and on AMFI's.

Why SIFs sit apart. SIFs were introduced to bridge the gap in portfolio flexibility between mutual funds and PMS. The minimum investment is Rs 10 lakh, counted across all investment strategies of the same AMC, and the permitted strategies include long-short structures with unhedged short exposure.

Illustrative. The investor, strategies, levels and dates are hypothetical; the rules are the workbook's.

Anand invests in two SIF strategies of the same AMC:

6,00,000 + 4,00,000 = Rs 10,00,000

That meets the Rs 10 lakh minimum, because the threshold is counted across all strategies of the same AMC — neither holding would meet it alone.

In August, the monthly evaluation moves the equity long-short strategy from level 4 to level 5. Anand receives a notice-cum-addendum and an email or SMS; the debt strategy's holders do not, since only the equity strategy changed. The August band appears on the AMC's website by 10 September. At year-end, the disclosure as on 31 March shows level 5 and one change during the year.

What Anand should not do is compare that level 5 with a large-cap fund showing Very High on its risk-o-meter and conclude the two carry similar risk. They are measured on different scales.

Chapter 5 (Scheme Related Information), section 5.1.6, introduces the Risk-Band for SIFs immediately after the risk-o-meter, with the five levels, NFO assignment, monthly evaluation, 10-day website disclosure and annual 31 March disclosure. Chapter 2 introduces SIFs and their Rs 10 lakh minimum. Expect questions contrasting the five-level Risk-Band with the six-level risk-o-meter and on its disclosure deadlines.

• Five levels, not six. The risk-o-meter has six; the Risk-Band has five.
• Level 1 is lowest, level 5 is highest.
• Assigned at NFO, evaluated monthly, disclosed within 10 days of month-end.
• Annual disclosure as on 31 March includes how many times the level changed — on the AMC's and AMFI's websites.
• The two scales are not comparable. SIFs are described as riskier than all other mutual fund schemes; a SIF level cannot be read against a risk-o-meter level.
• The Rs 10 lakh SIF minimum is across all strategies of the same AMC, not per strategy.
• For commodity investments the risk-o-meter uses annualised-volatility bands (below 10% = 3, above 20% = 6); that table belongs to the risk-o-meter, not the Risk-Band.