A thorough assessment of the constituents of a mutual fund scheme’s portfolio is just as important as gauging its past performance, as the Securities and Exchange Board of India (SEBI) has reiterated through its latest move to modify the scheme risk-o-meters.

This holds especially for debt mutual funds, given their debacle during material credit events and the ensuing liquidity crisis due to lack of market depth for lower-rated credits in the past couple of years.

A Crisil analysis shows that debt mutual fund portfolios have suffered a series of defaults since July 2018, with total credit loss of ~Rs 18,000 crore.

To be sure, risk-adjusted returns is a crucial metric to assess the performance of mutual funds. However, it does not always factor the portfolio risks associated with the underlying investment.

This is the reason the market regulator has been pushing disclosure and differentiation of mutual fund categories based on underlying investments.