SEBI to Tighten Disclosures on Expenses, Expense Ratio, Returns, Yields and Risk-o-Meter for Mutual Funds

October 3, 2024 Mutual Fund

The capital market regulator, the Securities and Exchange Board of India (SEBI), in order to facilitate enhanced transparency, make it easy to understand for investors, and standardise the approach towards disclosures by mutual funds, last week on September 27, 2024, released a consultation paper.

In it certain changes have been proposed that shall help you, the investors make an informed investment decision. Here’s what the regulator has proposed.

Disclosure of Expenses, Expense Ratio, Returns of Regular Plan and Direct Plan

Mutual funds, as you may know, are required [under Regulation 59 of SEBI (Mutual Funds) Regulations, 1996] to make half-yearly disclosure of unaudited financial results, which among others include recurring expenses, expense ratios, returns and compounded annualised yield.

At present, this is mandatory for the Regular Plan of mutual fund schemes. But considering that the expense ratio of the Regular Plan and Direct Plan is different, the regulator has proposed that the expenses and the expense ratio of the Direct Plan also be disclosed in standard format.

Notably, mutual fund distributors usually suggest to investors the type of schemes they should consider investing in and often provide a Regular Plan as the default option.

Similarly, there are some investors who seek the services of an investment advisor, who are allowed to recommend only Direct Plan of mutual fund schemes.

Likewise, some investors prefer to invest directly with the fund houses or through online platforms offering Direct Plans.

[Read: 5 Best Active Equity Mutual Funds with Low Expense Ratio And High Returns]

You see, the difference in the expense ratio of the Direct plan and Regular plan of diversified equity mutual funds ranges from 0.4% to 2%, with an average difference of about 1.2%.

Now while a marginal difference may not seem much at the outset, over the longer investment horizon, it does make a difference in the corpus you can build — thanks to the power of compounding.

Table 1: Difference in Expense Ratio and Impact on Your Wealth

For illustration purposes only.

The table above illustrates how a small difference in the expense ratio could weigh on the corpus. At the end of a 30-year period, the corpus under the Direct plan would have appreciated to nearly Rs 3 crore in the example above.

[Read: Direct vs Regular Plan: Can Expense Ratio Make Significant Difference to Your Mutual Fund Returns?]

Considering these finer points, which often investors overlook, the regulator vide the consultation paper has also proposed that mutual fund houses make separate disclosure returns during the half year and compounded annualised yields for both Regular Plan and Direct Plan.

To standardise the above disclosures, it is said that the format for half-yearly financial statements for mutual fund schemes shall be reviewed and finalised by the Association of Mutual Funds in India (AMFI), in consultation with SEBI.

Enhanced Disclosure of Risk-o-meter:

The regulatory guideline makes it mandatory for mutual funds to depict the risk of the scheme through a pictorial illustration of a meter, called the Risk-o-meter.

SEBI introduced the Risk-o-meter in July 2015, as a replacement to its earlier colour code labelling. All mutual funds are now mandated to publish a Risk-o-meter at the beginning of all scheme-related documents.

The current Risk-o-meters provides a visual description of the risk involved in a scheme, ranging from low, low to moderate, moderate, moderately high, high, and very high.

To further enhance the pictorial representation of risk, it is proposed by the regulator that the Risk-o-meter should be colour-coded as low risk in Irish Green, low to moderate risk in Chartreuse, moderate risk in Neon Yellow, moderately high risk in Caramel, high risk in Dark Orange, and very high risk in Red.

For illustration purposes only
(Image source: SEBI Consultation Paper, September 27, 2024)

For example, as illustrated above, the risk depicted by the Risk-o-meter in the above case is, moderately high.

[Read: Are You Setting Your Risk-Return Expectations Right While Investing in Mutual Funds?]

If there is any change in the Risk-o-meter, the regulator has proposed that this should be communicated to the unitholders of that particular scheme by way of a Notice cum Addendum as well as an e-mail or SMS.

To standardise the format of the disclosure and for ease of understanding of the change in the level of risk for unitholders of that particular scheme, the regulator has also proposed that mutual funds shall disclose the existing Risk-o-meter along with the revised Risk-o-meter (adjacent to existing one).

At present, the SEBI’s consultation paper is open for public comments. The comments or suggestions can be submitted latest by October 18, 2024, through this link-
https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=yes.

At PersonalFN, we believe that given that individual investors are gradually choosing the Direct Plan of mutual funds, and for the Risk-o-meter to truly depict the risk a scheme carries with meaningful colour codes, the regulator has taken steps in the right direction in the interest of investors to make an informed choice.

SEBI is continually taking measures for the well-being of investors at large with constructive feedback from the Indian mutual fund industry.

Nevertheless, ensure that you are investing in mutual funds considering your age, risk profile, broader investment objective, envisioned financial goals, and time in hand before those goals befall by following a sensible asset allocation rather than investing in an ad hoc manner.

If you have any doubt about selecting suitable mutual fund schemes for your portfolio (or any other investment product for that matter), don’t hesitate to seek the help of SEBI-registered investment advisors who can guide you throughout your investment journey.

Be a thoughtful investor.

Happy Investing!

This article first appeared on PersonalFN here