Sebi asks MFs to make more disclosures in ads

Sebi asks MFs to make more disclosures in ads

A good mutual fund (MF) scheme would be one that has consistently performed well. One of the factors that may build your confidence in a new fund offer (NFO) is how good the fund manager’s track record has been. But how do you ascertain these facts when buying schemes? With MF advertisements giving limited information, it is possible to get stuck into the scheme you don’t really need, unless you do your own research.

The capital markets regulator, Securities and Exchange Board of India (Sebi), is set to give you a handle to assess funds through advertisements. In a recent circular, Sebi has asked fund houses to include more details in their advertisements. It has also put the onus of regulating distributors on the fund houses.

“With higher degree of transparency, investors would be in position to take better decisions. Also, it may result in higher inflows in the long run," says Rajan B. Krishnan, CEO, Baroda Pioneer Asset Management Co. Ltd.

More disclosure in ads

Performance: Though funds advertise the performance of a scheme, they often do it for selective time periods.

Sebi has now fixed the time periods for which schemes have to mandatorily give the returns. MFs will now have to provide returns since inception, one-, two- and three-year returns. Moreover, along with returns from the scheme’s benchmark index (which funds mention at present), the schemes will also have to mention returns from the broader index for comparisons over the same time periods. Sebi has specified indices for all funds now, in addition to those that the fund house fix for their own schemes.

In case the scheme has been in existence for at least a year but less than three years, MFs need to mention returns since inception along with one- and two-year returns. Schemes that have been around for less than a year can’t advertise performance.

Reiterating a change it had proposed in a board meeting on 28 July, Sebi has also asked fund houses to give absolute return figures in rupees along with the compounded annual growth rate expressed in percentage. Sebi believes that investors may find it difficult to decode a percentage figure.

Fund manager’s credibility: A single fund manager may be looking after, say, five schemes but it is not necessary that all the schemes do well. Typically, at the time of advertising for an NFO, fund houses also advertise the fund manager’s name and the number of schemes that have performed well under him. But here, too, the information is often selective. For instance, out of five if only two schemes have done well under the fund manager, only those two will be advertised along with his name.

Sebi seeks to put an end to this practice too. It has mandated that performance data for all the schemes (up to six) managed by a fund manager be mentioned in advertisements. “If the fund manager manages more than six schemes, MFs may disclose the total number of schemes managed by him along with performance data of top three and bottom three schemes," Sebi circular said.

Regulation of distributors

Distributors’ fee: As announced in the earlier meeting, distributor fee has been notified. So investors will now have to pay a fee every time they invest at least Rs10,000. But this could lead to another problem. “No MF company is in position to check whether a distributor is splitting investments to enhance transaction charges," says Dhirendra Kumar, CEO, Value Research, an MF data tracker.

Curb on mis-selling: In a bid to sell as many schemes as possible, most distributors recommend funds without analysing the customer’s needs. Sebi has given broad guidelines to fund houses to put in place a structure to help curb mis-selling.

For instance, MFs need to ensure that a distributor being empanelled with them has its sales and relationship department de-linked to the department which evaluates customer risk profile and investment objective. In other words, relationship managers need not evaluate the risk profile of the customer to whom they want to sell a product, but a separate department having no interest in commissions does it. Currently, the agent or relationship manager who sells a scheme takes a call on the investor’s risk profile—his assessment may be incorrect or he may push a scheme to a customer who doesn’t need it for his own commissions.

In the same vein, MFs need to ensure that distributors sell the right product to the right customer. For instance, a small-cap equity scheme should be sold to a person with a high risk profile.

“Close to 600 distributors would be affected by the Sebi move but implementation of such mechanism will not be easy," says Kumar. Sebi has laid out certain criteria to filter out small distributors and lay a check on the large distributors with more clientele.

Though challenges remain, the new rules are definitely a step ahead in making MFs more transparent and customer friendly.