Risk Labels: the Riskometer and the Potential Risk Class
Two standard labels describe a scheme's risk: the riskometer, shown by every scheme, and the Potential Risk Class matrix, shown by debt schemes. This lesson explains how each is set, how they differ, and what neither can say.
The riskometer
The riskometer places every scheme at one of six levels. In rising order they are Low, Low to Moderate, Moderate, Moderately High, High and Very High.
The level is not fixed when the scheme is launched. It is evaluated every month from the scheme's actual portfolio and disclosed within 10 days of the month-end. A scheme's level can therefore move up or down as its holdings change.
The Potential Risk Class matrix
Debt schemes carry a second label, the Potential Risk Class. It is a matrix of nine cells that states the maximum of two risks the scheme may take.
One side shows interest-rate risk in three classes based on Macaulay duration: Class I is up to 1 year, Class II up to 3 years and Class III any duration. Macaulay duration is the present-value-weighted average time, in years, until a bond's payments are received; the longer it is, the more the bond's price moves when interest rates change. The other side shows credit risk, the risk that an issuer does not pay, in Classes A, B and C, where A is the highest credit quality. Three classes on each side give the nine cells.
A reading and a ceiling
The two labels answer different questions. The riskometer is a reading of the portfolio as it stood at the last month-end. The Potential Risk Class is a ceiling: the scheme's cell is the most interest-rate risk and credit risk it may take.
A scheme cannot move to a riskier cell unless the move is treated as a change in its fundamental attributes. In that case unitholders must be given written notice and at least 30 calendar days to exit at NAV without exit load. A reader therefore knows the outer limit of a debt scheme's risk, and is told before that limit is raised.
Both labels describe risk. Neither predicts returns, and a scheme at any level can lose value.
Rules at a glance
One debt scheme, two labels (illustrative)
An illustrative debt scheme sits in Class II for interest-rate risk and Class B for credit risk. Whatever its manager does, the portfolio's Macaulay duration may not go beyond 3 years, and its credit risk may not go beyond Class B.
Its riskometer reads Moderate this month. If the portfolio changes, next month's reading may be Low to Moderate or Moderately High. What cannot happen quietly is a move to Class III or Class C: that would be a change in fundamental attributes, with written notice and an exit window of at least 30 calendar days.
Key points
- The riskometer has six levels: Low, Low to Moderate, Moderate, Moderately High, High and Very High.
- It is evaluated monthly from the actual portfolio and disclosed within 10 days of the month-end, so the level can change.
- The Potential Risk Class matrix for debt schemes has nine cells: interest-rate risk (Class I to III) against credit risk (Class A to C).
- A move to a riskier cell is treated as a change in fundamental attributes.
- Both labels describe risk; neither predicts returns.
Common misunderstandings
- A riskometer level is not permanent: it is worked out every month from the actual portfolio and can change.
- The Potential Risk Class is not a reading of current risk: it states the maximum the scheme may take.
- A lower risk label is not a promise of capital or of returns: both labels describe risk only.
Questions people ask
Which schemes show a Potential Risk Class?
Debt schemes. Every scheme, of any type, shows a riskometer.
Which credit class is the highest quality?
Class A. Classes B and C allow progressively more credit risk.
Can a debt scheme shift to a riskier cell?
Only by treating the move as a change in fundamental attributes, which gives unitholders written notice and at least 30 calendar days to exit at NAV without exit load.
What this lesson relies on
- SEBI Master Circular for Mutual Funds, 20 March 2026 (riskometer; Potential Risk Class matrix, paragraph 6.18.6; change in fundamental attributes)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.