Performance ads: Too complicated

An investor should not go by the fund house's claims. Rather, he should be comparing funds based on returns over different time-frames provided by a third-party.



Financial product regulation in India seems to fall into two extremes. In some products, there is so little regulation that the investor is left to fend for himself. In others, investor protection is taken so far that he is offered no opportunity to do his own homework.

SEBI's new rules on performance advertisements by mutual funds seem to fall into the latter category.

Calendar quarter rule

Until now, the rules governing mutual fund performance advertisements were a simple affair. Funds were required to present returns for less than one year in absolute terms and those for more than one year in compounded annualised returns. But SEBI's circular in August tweaking the rules for performance ads, introduces many complications.

For one, for schemes that have existed for more than three years, fund houses will now be required to provide the returns since inception and “for as many twelve-month periods as possible for the last three years, such periods being counted from the last day of the calendar quarter preceding the date of the ad”.

If that has your head reeling, what it means is that a fund should advertise its performance for one-year at a time, for standard end-of-quarter dates (that is, March 31, June 30, September 30 and December 31). If a fund you own advertises its returns today (September 4), it can only do so for the year ending June 30 and not any later.

Now, what SEBI is trying to do with this rule is to ensure comparability of returns across schemes. This way, fund houses will not have the leeway to advertise their returns for short and arbitrarily chosen periods. However, the flip side of this rule is that fund houses may not be able to present their latest return picture to investors. A lot can change with returns over a quarter, especially with equity funds. After the bloodbath in stocks, equity fund returns today may bear no resemblance to those on June 30. An investor choosing funds would certainly be better off knowing which funds fared well in the most recent period rather than those that fared well in the year ended June 30. In any case, an investor selecting funds should scarcely be doing it based on the performance claims from the fund house.

Little practical insight

To get an objective picture on performance, it is best that he compares across a category of funds on 1-, 3- and 5-year returns provided by a third-party. Then there is the rule that whenever a scheme's returns are advertised, the ad should also include data for all the other schemes managed by the same fund manager. This rule is probably in place to ensure that fund managers don't play favourites, pumping up the performance of one fund while neglecting others. However, such data may offer little practical insight to the investor. After all, fund managers seldom manage many schemes in the same category.

A manager of a large-cap fund may also oversee a mid-cap fund or a theme fund. In that case, a return comparison of the different categories of funds within the same house would have limited relevance to an investor. After all, an investor decides to buy a diversified, theme or mid-cap fund based on his own risk profile. What he is looking for is return information on all funds in a category managed by different houses.

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