The Securities and
Exchange Board of India (Sebi) is planning a standard set of disclosures
for mutual fund fact sheets, advertisements and scheme information
documents (SID), a person familiar with the matter told ET. This will
not only give a clearer picture about the performance of the schemes,
but will also help investors compare similar schemes of different fund
houses.
The regulator is aiming at more of quantitative disclosures,
and not just qualitative disclosures as is the case at present.
For instance, take returns.
The thinking within Sebi is that returns alone do not define
performance. A scheme may generate high returns by taking more risks,
but this may not be palatable to the conservative investors in that
scheme. Once the risks taken by fund managers are quantified, investors
can compare the performance of various schemes before deciding on the
one that suits their temperament.
Around three years ago, the Association of Mutual Funds in
India (Amfi) had issued a standard format for fact sheets. But many fund
houses do not adhere to that.
One of the shortcomings of that format was that it left the
definition of certain parameters to the discretion of fund houses. As a
result, the performance of a scheme cannot be compared with that of its
peer group.
For example, certain funds disclose the volatility on a
monthly basis, while other funds disclose the annualized volatility. The
funds do not disclose the risk-free rate they have taken as the
standard while calculating the Sharpe ratio — the measure of
risk-adjusted returns. Many funds do not disclose portfolio turnover,
which tells an investor how often the fund manager churns his holdings.
Sebi has proposed certain quantitative parameters to assess
the performance of various types of schemes. For instance, in case of
equity schemes, fund returns will have to be mentioned on an annualized
basis after accounting for short-term capital gains tax and the dividend
paid out during that period. Further, funds should also calculate
volatility as the annualized standard deviation of the weekly returns
over the concerned period.
Similarly, the recurring expenses being charged by the scheme
are also important for the investor as most funds in their SID only
disclose the maximum expenses they would charge. These generally
comprise the outer limit and do not reflect the actual expenses being
charged. Similarly, in debt schemes, the fund must reveal the short-term
and long-term risk-free rates to help the investor assess whether the
fund manager has actually attained higher returns
for them.
Sebi
also wants the mutual funds to give advertisements that give a holistic
view of the performance of asset management companies (AMCs). The fund
houses will have to publish advertisements that have specific
quantitative parameters apart from just the scheme and benchmark
returns.
“Most of the AMCs were advertising only the list of their
best-performing schemes, while there is no mention of those schemes
which are either faring poorly or giving average returns,” said a person
familiar with the regulator’s proposals.
