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
| Mutual fund | Riskometer label | 5-year annualised standard deviation | 5-year maximum drawdown |
|---|---|---|---|
| Parag Parikh Flexi Cap | Very High | 10.56% | 14.01% |
| UTI Nifty 50 Index | Very High | 13.11% | 14.73% |
| Nippon India Small Cap | Very High | 17.53% | 23.18% |
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.
Disclaimer: Business Today provides market and personal news for informational purposes only and should not be construed as investment advice. All mutual fund investments are subject to market risks. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.