The new risk-o-meter introduced by SEBI will drive home the point to investors that higher returns come with higher risks, Ananth Narayan, Associate Professor, Finance SPJIMR said in a panel discussion on CNBC-TV18.

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“One of the issues that AMCs had in the past that you have investors asking for higher returns without recognizing that that will only come if you have a higher risk. So hopefully, when you have a scurry for returns, the fact that the risk is also going up either through credit risk or liquidity risk will show up prominently and therefore, investors will be better informed and will be able to take a better decision,” Narayan said.

He said the new mechanism would be greatly help investors in debt funds.

“Take debt fund for instance, much of the issues around credit risk and for that matter liquidity risk is dependent upon the rating of the paper as well as nature of the paper whether it has any bespoke structure embedded etc,” he said.

“If I have to think like a crook on how I make credit fund look safer than it is; it is probably by cutting down on duration, but remember duration has lesser weightage as far as the risk-o-meter is concerned. Liquidity is given the primary importance which means if there are issues that come up there, it will straight away show up in my risk and will overwhelm any duration risk.”

Sandeep Parekh, Managing Partner, Finsec Law Advisors agreed with the points made by Narayan.

“It’s something which is going to be true to label,” Parekh said, “..so whether you are looking at duration or the risk-o-meter; essentially the fact is that the investors will get a better sense of what they are buying.”

Swarup Mohanty CEO, Mirae Asset Global Investments said that funds will now have a risk history since the risk report will be made public monthly. Mohanty did not see any operational problems in implementing the new risk-o-meter and said the regulation will be quite significant for debt mutual funds.

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