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Money Aug 8, 2013

Don’t go by mutual fund labels. They could mislead you

By Firstbiz Editors

The Securities and Exchange Board of India (Sebi) came out with a circular on product labelling for mutual funds to make investors aware of any risks associated with it, and to address the issue of mis-selling, on 19 March this year. This guidelines came into effect on 1 July, 2013, to all the existing schemes and all schemes to be launched on or thereafter.

According to the circular, it was decided that all the mutual funds shall 'Label' their schemes on the parameters as mentioned under:

Reuters

Reuters

First is the nature of scheme such as to create wealth or provide regular income in an indicative time horizon (short/medium/long term). Second is a brief about the investment objective (in a single line sentence) which is followed by kind of product in which an investor is investing (Equity/Debt). And third is the level of risk, depicted by colour code boxes:

A Blue box would indicate, principal at low risk.
A Yellow box would indicate, principal at medium risk.
And a Brown box would indicate, principal at high risk.

But has this labeling worked at all?

According to a report published in The Times of India today, last month funds which lost money were mostly bond funds. Bond funds have a blue label on them. This is ironic as a blue box indicates low risk and with all the RBI's liquidity tightening measures, debt funds were riskier last month. High risk equity funds were also better placed. Though the Sensex fell, its decline was not worse than the bond prices, says the report.

This clearly shows that even if the fund comes with a blue box it does not mean it is any less risky. In fact, there is a good possibility that if you invest in equity for a long term of 15 years, it becomes relatively lower risk investment for you. Of course, in the long term bond funds are less riskier than equities, but in the short term, it could be an entirely different story. Read the full ToI report here.

The truth is that just a few limited number of colours do not serve the range of indicating risk. Sebi has taken the labelling initiative to create awareness among investors aboutthe kind of investments they are getting into. Investor education is a more important than awareness and for this individual investors are responsible.

by Firstbiz Editors

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