Sebi’s move to issue a framework on ?product labelling? is expected to help novice investors in assessing basic risks associated with mutual fund investments but is unlikely to benefit experienced investors.
?The colour coding will help first-time investors as well as the new cadre of distributors who will sell simple mutual fund products,? said Dhirendra Kumar, CEO, Value Research, a mutual fund tracker. Added Sarath Sarma, executive director, IDBI MF: ?The move will help investors but has to be advertised well so that investors understand its significance.?
Sebi, in its circular on Tuesday, said mutual fund houses would have to start labelling their products from July 1. The level of risk will be depicted by colour code boxes ? with blue indicating low risk to the principal, yellow indicating medium risk and brown depicting high risk. Also, the colour codes will be described in text beside the colour code box.
While industry observers believe that the market regulator had done a good job of keeping things simple, they felt a little more clarity could have helped. ?In an effort to keep the colour coding simple for the retail investor and the distributor, the product labelling has lost out on the qualitative aspect. For example, a large cap, a multi cap as well as a sectoral equity fund will all be colour-coded brown but the risks for each of these categories under the same equity asset class is different,? said Jimmy Patel, CEO, Quantum MF.
He added that the colour code did not help in differentiating the risks associated between schemes of different fund houses. The colour coding does not take into account a scheme’s past track record or the fund manager’s ability to manage a fund, pointed out Patel. ?And what if a fund house views its large cap or multi cap equity scheme as less risky and wants to grade it as yellow??
Market watchers said that some of these issues could have been addressed with the help of additional gradding. For instance, while an equity scheme can be depicted as brown, different shades of brown can be used to denote the different levels of risk, with an additional clarification from the fund house to justify the particular shade. ?This could have handled mis-selling in terms of a mismatch between the risk profile of the product vis-?-vis that of the investor, which unfortunately is not being achieved in the current stipulation,? said Patel.
However, Kumar of Value Research believes that too many colours could unnecessarily complicate matters. ?Imagine looking at seven colours on a traffic signal instead of three. Anything more than three colours is a bit difficult to register in one’s mind,? said Kumar. However, Kumar was quick to add that the current system of product labelling would not be of much use to experienced or sophisticated investors.