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nism-series-va-commodity-risk-value-volatility-threshold[ MUTUAL FUND DISTRIBUTORS ]

Under SEBI regulations for evaluating the risk score of permitted commodities (like Gold and Silver) in mutual fund schemes, what risk value is assigned if the 15-year annualized volatility of the commodity index exceeds 20%?

[ A ]Risk value of 6 (Very High)[ CORRECT ]

[ B ]Risk value of 1 (Low)

[ C ]Risk value of 3 (Moderate)

[ D ]Risk value of 0 (Risk-Free)

Takeaway

Option A is correct: Risk value of 6 (Very High)

Derivation

SEBI guidelines assign risk scores to permitted commodities based on the annualized price volatility of the benchmark index computed quarterly over the past 15 years: (1) Volatility < 10% = Risk Value 3 (Moderate), (2) 10-15% = Risk Value 4 (Moderately High), (3) 15-20% = Risk Value 5 (High), and (4) > 20% = Risk Value 6 (Very High). A volatility exceeding 20% maps to Risk Value 6. This tests quantitative risk scoring rules. A common error is assuming commodities are treated as risk-free or low-risk assets.

Why the others fail

B — Risk value of 1 (Low)

A risk value of 1 is reserved for ultra-low volatility cash equivalents, whereas high-volatility commodities (>20%) receive a score of 6.

C — Risk value of 3 (Moderate)

Risk value 3 corresponds to annualized volatility below 10%, whereas volatility above 20% escalates to risk value 6.

D — Risk value of 0 (Risk-Free)

Commodities are subject to market price fluctuations and are never treated as risk-free (score 0) in riskometer calculations.