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  us. 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 annualised 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 annualised 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 annualised 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.

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