Mutual funds product labeling
Mutual funds product labeling is another initiative by SEBI to stop mis-selling by some distributors. This measure also helps investors to easily identify risk involved to their principal amount. In its circular CIR/IMD/DF/5/2013 dated March 18, 2013, SEBI directed all Asset Management Companies to implement mutual funds product labeling with effect from 01 Jul 2013. AMC’s at their discretion can implement this before 01 Jul 2013 if desired. It is applicable for all existing schemes and new fund offers to be introduced by Asset Management Houses.
Mutual funds product labeling will have three lines of message.
First line indicates nature of scheme (regular Income / wealth creation) with indicative time horizon like short, medium or long term.
Second line indicates brief objective of the scheme and product type (Equity / Debt).
Third line is a colour coded box indicating level of risk. Three colours are displayed depending on the risk of the fund and each colour meaning is as below.
– Blue indicates low risk to principal
– Yellow indicates medium risk to principal
– Brown indicates principal is at high risk.
After this there should be a disclaimer to contact financial advisers in case difficulty in understanding the product suitability to their needs.
A sample mutual funds product labeling for a Fixed Maturity Plan ( FMP ) with low risk
A hybrid fund scheme with medium risk is represented by a label as below
It is known that equity schemes are are high risk for short term investments. Here is a sample mutual funds product labeling for equity schemes offered by mutual funds
Mutual funds product labeling will be displayed on the front page of all New Fund Offer (NFO) applications, Scheme Information Documents (SID) and Key Information Memorandum (KIM) and common application forms. The labeling should be clearly visible and should be in close proximity to the caption of the scheme. All Scheme related advertisements should also contain mutual funds product labeling and should be prominently visible.
Although, these measures by SEBI are an welcome move to increase investor awareness about risk of products, their suitability and stop mis-selling of non-suitable schemes to investors by agents, some points need to be considered by investors before taking their investment decision.
Equities by nature are risky as an asset class in short term. But in long term they give better inflation adjusted returns compared to other asset classes. One should remember that risky nature of equities are for short term only and for long term (For eg: more than 5 years) they are not so risky specially with a diversified investment. Although, Fixed Maturity Plans and Other schemes provide maximum protection to capital invested, their inflation adjusted returns are not good.
Just high risk nature (Brown colour) of the scheme should not deter investment decision purely on this basis. This is more true, if one is considering investments for long term with a goal of wealth creation. Income funds are more suitable for investors with short term investment horizon and looking for protection of their capital. Hybrid funds takes place in between equity and income funds.