SEBI colours investors portfolio with MF product labeling

Holi – The festival of colours brings joy to every life.

This year SEBI has also added colours to Holi for making lives of investors more colorful. It is to be seen whether lives of investors across the country will really become colourful with this move of SEBI called “Product Labeling in Mutual Funds”.

So what has SEBI done this Holi? Aren’t you curious to know?

After standardization of health and life insurance products by insurance regulator IRDA, the capital market regulator SEBI has come up with “Product Labeling in Mutual Funds”. SEBI has taken this step in order to control mis-selling in mutual fund industry. This step can help mutual fund investors get some idea of the scheme by looking at the product label before investing.

What is ‘Product Labeling’ and how does it work?

As per the circular, all mutual fund schemes should ‘Label’ the scheme with respect to the nature of the scheme, investment objective and the level of risk associated with the scheme.

a) Nature of scheme:

The investor can identify and match the scheme as per his requirements depending on his investment’s time horizon. All the schemes need to label its nature i.e. short-term / medium-term / long-term. Say for example, if a scheme has a label ‘long-term capital growth’, it indicates, you can consider investing in this scheme if you have a long-term investment horizon and would like to invest in for wealth creation.

b) Investment objective:

All the schemes need to brief the investment objective of the scheme in one sentence followed by the kind of the category / kind of the scheme, so the investor can get some idea about where the mutual fund scheme is investing the funds. Say for example, if a scheme has a label ‘Investment in Debt/Money Market Instrument/Govt. Securities’; it clearly indicates that, the scheme invests the funds in money market and govt. securities, and thus it is a Debt scheme.

c) Level of risk:

Each scheme will have a specific colour depending on the risk associated with the scheme. SEBI has allocated the following colours according to the level of risk.

Blue – Low risk

Yellow – Medium risk

Brown – High risk

d) Disclaimer

All the schemes need to have a disclaimer saying, the investors need to consult their financial adviser if they are unable to identify and decide suitable scheme for them.

How will “Product Labeling” benefit MF investors?

Just like looking at the traffic signal, the pedestrian knows when to cross the road; similarly by looking at the label of the mutual fund scheme, the investor will be able to identify the type of the scheme and whether it is suitable for him or not. The main fear of the investor is the safety of the principal invested; so before investing if the investor checks the colour allocated to the scheme, he can get an idea of the level of the risk associated with the investment. After the product labeling, the chances of the investor falling prey of mis-selling from the agent will reduce. The investor will be able to select the scheme as per his investment time horizon and will be aware where the scheme invests the pooled funds.

All the schemes needs to be labeled in the initial application form, Key Information Memorandum, Scheme Information Document and the common application form. This will be effective from 1^st July 2013. This is good move by SEBI considering the investors interest and helping the investors to take informed decision. The only thing which investor cannot measure from the product labeling is the fund performance of the scheme, for which he will still have to either research himself over the internet, rely on the advice by the experts featured by media but the best bet would be his financial advisor.

Published in: Moneycontrol.com