How to read a fund: riskometer, benchmark, expense ratio

Every fund page shows the same three labels: a riskometer, a benchmark and an expense ratio. Most people skip all three and jump to last year's return. The three labels tell you what you are buying. The return tells you what already happened to someone else.

The riskometer

SEBI requires every scheme to carry a riskometer, a dial with six levels: Low, Low to Moderate, Moderate, Moderately High, High, Very High. The level is recalculated every month from what the fund actually holds, and it is printed on the fund's page, factsheet and your statements.

• Overnight and liquid funds usually sit at Low or Low to Moderate.
• Most debt and conservative hybrid funds sit around Moderate to Moderately High.
• Nearly all equity funds, including large-cap and index funds, sit at Very High.

Very High does not mean "avoid". It means the value can swing a lot, so the money should stay for years. A distributor is required to check that a fund's risk level suits you before recommending it. If a fund's riskometer is above what you can stomach, the answer is a different family, not a smaller SIP.

The benchmark

Every fund names a benchmark, an index it is supposed to be measured against. A large-cap fund might use the Nifty 100. A short-duration debt fund uses a bond index. The benchmark answers one question: is the fund manager earning their fee?

When you look at a fund's returns, look at the benchmark's return for the same period beside it. A fund that made 14% when its benchmark made 16% did a poor job, even though 14% sounds good. A fund that made 9% when the benchmark made 7% did a good job. Look at three-year and five-year periods, not just the last twelve months, and check whether the fund beat the benchmark consistently rather than once.

The expense ratio

The Total Expense Ratio (TER) is what the fund charges each year to run itself: management fee, registrar costs, distributor commission on a regular plan, and so on. It is quoted as a percentage of your money, and it is deducted a little every day inside the NAV. You never see a bill. The NAV you see is already after costs.

SEBI caps the TER by scheme type and by the size of the fund, with larger funds required to charge less, as notified by SEBI from time to time. Index funds and liquid funds sit at the low end; actively managed equity funds at the high end.

A 1.5% charge sounds small. Over twenty years, 1.5% a year compounds into a meaningful chunk of your final value, which is why the next chapter on direct and regular plans matters.

Two more things on the page

• Exit load. A charge, often 1%, if you redeem within a set period, usually one year for equity funds. It is not a fee for the AMC; by rule it goes back into the scheme for the investors who stayed. There has been no entry load on any fund since 2009.
• AUM and age. Assets under management tell you how big the fund is. Age tells you whether the track record covers a bad market as well as a good one. Neither is a quality score, but a fund that has lived through a crash tells you more than one that has not.