Markets regulator Sebi on Monday revamped the product labelling on mutual fund schemes under the risk-o-meter by introducing "very high risk" category to warn investors.

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The existing five categories to measure risks are - low, low to moderate, moderate, moderately high, and high.

Based on the scheme characteristics, mutual funds will assign a risk level for schemes at the time of launch of scheme/new fund offer, Securities and Exchange Board of India (Sebi) said in a circular.

It further said any change in risk-o-meter will be communicated by way of notice-cum-addendum and by way of an e-mail or SMS to unitholders of that particular scheme.

Risk-o-meter will be evaluated on a monthly basis and mutual fund houses will have to disclose the risk-o-meter along with portfolio disclosure for all their schemes on their respective website and on the industry body Amfi website within 10 days from the close of each month.

Sebi said mutual funds will have to disclose the risk level of schemes as on March 31 of every year, along with the number of times the risk level has changed over the year, on their website and Amfi website.

The risk in equity funds will be judged on the basis of three parameters - market capitalisation, volatility, and impact cost.

With regard to debt securities, Sebi said it will be assessed on the basis of credit risk, interest rate, liquidity, among others.

For investment by mutual funds in instruments having short-term ratings, Sebi said, "the liquidity risk value and the credit risk value shall be based on the lowest long term rating of the instrument of the same issuer (in order to follow conservative approach) across credit rating agencies".

However, if there is no long term rating of the same issuer, then based on credit rating mapping, the most conservative long-term rating will be taken for a given short-term rating.

Sebi said mutual funds need to publish scheme in a tabular form scheme-wise changes in risk-o-meter in the annual reports and abridged summary.

The product label will be disclosed on the front page of the initial offering application form, Scheme Information Documents (SID) and Key Information Memorandum (KIM). Also, it needs to be disclosed on the common application form ? along with the information about the scheme.

Scheme advertisements should be placed in a manner so as to be prominently visible to investors.

"Change in risk-o-meter will not be considered as a fundamental attribute Change of the scheme in terms...Of Sebi (Mutual Fund) Regulations," the regulator noted.

This directive will be in force with effect from January 1, 2021, to all the existing schemes and all plans to be launched on or thereafter. However, mutual funds may choose to adopt this directive before the specified time period.

"Sebi has come up with a detailed description of risk associated with debt, equity and derivatives instruments. This will enhance the risk information available to Investors and Investors can now map their investments based upon their risk profile.

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"This is a very good initiative from Sebi and looking at the recent experiences where there has been a gap between perceived risk and actual risk and quite pragmatic approach for the protection of Investors interest," said Omkeshwar Singh, head RankMF at Samco Securities.