The Association of Mutual Funds in India’s (AMFI) directive to fund houses regarding the use of projected returns in advertisements is a step in the right direction to curb mis-selling, say MF executives and distributors.
However, some say the efforts towards educating investors should be ramped up.
Reports last week said industry body AMFI has told fund houses they can only show 10-year rolling returns (compounded annually) while showcasing returns in their advertisements. They aren’t permitted to show future returns, even as illustrations.
Rolling returns are described as the average of annual returns over a specific time frame. They help determine how the fund has performed over the specific holding period, and give a more accurate and transparent picture to the investor.
On the other hand, point-to-point returns are specific to the period in consideration, and do not eliminate any recency bias.
“Rolling returns are definitely more accurate than point-to-point returns to showcase performance, and this regulation is important as it will enable investors to get a clearer picture,” said Pratik Oswal, head of passive funds at Motilal Oswal AMC.
According to Value Research, equity mid-cap funds have delivered close to 28% on a three-year basis and 20% on a 10-year basis, when calculated on a point-to-point basis. Similarly, small-cap funds have given over 35% and 21% over the same time periods.
In comparison, on a rolling basis, 3-year returns for mid-cap funds came in at 22.23%, while 10-year returns were 16.17%. For their small-cap peers, 3-year and 10-year returns on a rolling basis stood at 27.82% and 17.24%, respectively.
The move is said to have been triggered by markets regulator Sebi’s observations that many of the promotional material and advertisements were designed in a way that could give a misleading projection to investors. This could have led them set expectations of fixed returns every year.
“The regulator may have come across instances where AMCs (asset management companies) or distributors were selling schemes projecting unreasonable returns, and decided to take action. This is a tightly regulated industry and any malpractice will get exposed anyway,” said a senior executive at a fund house.
He, however, pointed out that this will make marketing of certain schemes more difficult. “We are at 40 million investors now, and are targeting 400 million over the next few years. Insurance companies have no such restrictions, and are able to push products that are not really beneficial for the investor, while MFs offer a more disciplined way of investing with realistic returns.”
The executive said that in case of SIPs, future return projections have been capped at an upper limit of 13%. This essentially means that even if certain equity funds may have consistently delivered higher returns, no one can project above 13% compounded returns for the investment period ahead.
He pointed out that at present, illustrations are used in the case of SIP or SWP calculators to show how investments compound over time. These calculations may be provided for equity, fixed income, hybrid, and multi-asset categories.
“Mis-selling has no doubt been an issue, but we have to be mindful that different investors have different risk capacity. For example, mid-cap and small-cap funds could offer upwards of 20% in returns, and someone with the money and risk appetite could go for these asset classes,” said an MF distributor based in Mumbai, who did not wish to be named.
He pointed out that with appropriate disclaimers and education, investors can be sold higher returns as long as they have the risk appetite.