The Securities and Exchange Board of India (Sebi) has written to mutual fund industry body Amfi, asking it to bring uniformity in the existing colour-coding scheme ? which reflects the level of risk ? for mutual funds products.
The regulator has asked Amfi to come up with standard guidelines prescribing certain parameters for product labelling to ensure the same product is not labelled differently by different fund houses, said sources. Sebi is concerned that different colour codes used for similar schemes could create confusion in the minds of investors. Currently, fund houses can use their discretion to label the same products differently. For instance, one fund house could label an income scheme blue, implying low risk, while another could label it yellow, implying medium risk.
Sebi has also clarified that the product labels need to be disclosed in scheme advertisements if these are about specific schemes. It is not clear by when and based on what parameters would this standardisation be worked out by Amfi. Amfi declined to comment on the story, while an email sent to Sebi went unanswered at the time of going to press.
MF houses have started labelling their schemes from July 1. The level of risk is depicted by colour code boxes ? with blue indicating low risk to the principal, yellow indicating medium risk and brown depicting high risk. The product label has to be disclosed in scheme advertisements, application forms and key documents related to the scheme.
In its existing form, the colour code does not help differentiate the risks associated between schemes of different fund houses nor does it take into account a scheme’s track record or the fund manager’s ability to manage a fund, said market watchers. ?Colour coding seems like a simplistic solution. It does not, for instance, take into account the risks associated with the investment style. At best, investors can use it as just one of the filters to assess risk before making their investment decision,? said Vicky Mehta, senior research analyst, Morningstar India.
For instance, both a large-cap fund and small-cap fund are colour coded brown though the risks vary. Similarly, most fixed-income schemes can be colour coded blue even if one scheme invests in AAA-rated papers while the other in A-rated paper.
The underperformance of debt funds ? typically colour coded blue ? in the past few weeks has also turned the spotlight on the inefficacy of the existing product labelling system. Debt schemes with higher durations, in particular, have seen a significant erosion in their returns since July 16.
However, some experts still believe there is some merit in the existing system. ?It has been a good beginning; at least there is some guideline in place now,? said Himanshu Pandya, VP & head, products, ICICI Prudential Asset Management. ?Colour coding is an easier way of telling investors about the risk quotient inherent in a product.?