Capital market regulator Sebi wants additional investor disclosure from mutual funds in the form of a more granular “riskometer” and to conduct stress tests across all funds, not just small and mid-cap funds.

The riskometer, available in mutual fund scheme documents, classifies the risk of investment into six distinct levels — low, low to moderate, moderate, moderately high, high and very high — based on the underlying portfolio.

However, it is unable to distinguish different schemes such as mid-cap or small-cap within the equity segment.

“While mutual funds do a good job in explaining returns to investors, there is a need to explain risk better as well. Our riskometer is good but I think the time has come to take it to the next stage,” said Sebi whole-time director Ananth Narayan Gopalakrishnan at a session organised by ICC on Saturday.

He further said that mutual funds need to conduct stress tests across schemes and disclose the risks to the investors. What MFs do now is for individual schemes. It has to be done across all schemes. The average daily trading volumes have gone up tremendously in the last two years. This is because mutual funds are buying. If they start to sell who will buy and will the volumes sustain. That is the kind of stress analysis that needs to be done,” said Gopalakrishnan.

Every month, AMFI discloses pro rata liquidation of 25 per cent and 50 per cent of the portfolio in the case of mid-cap and small-cap funds only. Along with it, there is also disclosure of concentration, volatility and valuation across funds within these two categories.

AMFI chief executive Venkat Nageswar Chalasani, who was also present at the same event, said on the sidelines that the industry body is working with the stakeholders to prepare a model that will be able to do the stress test of mutual funds across the schemes and then it would be taken to the regulator for its approval.

He added that the riskometer also needs to be improved upon so that it is easier for investors to identify the risks associated with a fund.

The various upgrades of disclosures could take around 6-12 months.

Gopalakrishnan further said that the regulator is looking to introduce T+0 settlement for mutual funds so that investors can receive the amount quickly from the sale of mutual fund units.