Your mutual fund says “High Risk”. But do you know what that risk actually means?

Open a mutual fund factsheet and you will likely find a small gauge called the riskometer, with its needle often sitting in the red. But while the label is designed to help investors understand risk, it does not necessarily tell them how much a fund could fall or whether that level of risk is suitable for their financial goal.

According to Harsh Soni, Founder of NYVO, the riskometer is a rules-based measure rather than an opinion. Since January 2021, mutual funds have been required to calculate the riskometer based on the securities held in the portfolio, with the assessment recalculated every month.

Why do so many equity funds show “Very High Risk”?

The riskometer considers factors including the size of companies in a portfolio, their volatility and liquidity. These scores are combined, with an average above 5 classified as “Very High” risk, according to the methodology cited by Soni.

This can result in very different equity funds receiving the same risk label.

For example, Soni compares three funds that were classified as “Very High Risk”: Parag Parikh Flexi Cap, UTI Nifty 50 Index and Nippon India Small Cap.

Their five-year annualised volatility and maximum drawdown were:

Three funds, same “Very High Risk” label

Figures are for direct plans as of August 31, 2026

The figures, provided by Soni, show that although all three funds carried the same riskometer label, their historical volatility and worst declines were different.

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What the riskometer does not tell investors

Soni argues that the riskometer does not directly incorporate how much a fund has historically fallen, portfolio concentration or the correlation between its holdings. It also does not consider when an investor may need the money.

That distinction can matter when evaluating investment risk. A temporary decline may have a very different implication for an investor saving for a long-term goal than for someone who expects to withdraw the money in the near term.

“Very High” does not mean the same thing for everyone

The “Very High” classification describes the risk characteristics of the portfolio under the prescribed methodology. It does not establish whether that level of risk is appropriate for an individual investor.

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Soni suggests that investors use the riskometer as a starting point rather than the entire risk assessment. Investors can then examine the fund’s historical volatility and maximum drawdown to understand how the portfolio has behaved during different market conditions.

The riskometer therefore provides one standardised measure of portfolio risk, but investors may need to look beyond the label to understand the potential range of outcomes and whether those risks align with their investment horizon.

Riskometer levels are as disclosed by each fund house. Fund figures cited above are five-year annualised standard deviation and five-year maximum drawdown for direct plans as of August 31, 2026. The scoring methodology cited is based on SEBI circular SEBI/HO/IMD/DF3/CIR/P/2020/197 dated October 5, 2020, effective January 1, 2021.

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