Transparency push: MFs may soon have to show expenses, returns of direct plans separately

In a bid to enhance transparency and standardise disclosures, market regulator SEBI plans to direct the mutual fund industry to disclose expenses, expense ratios, returns and yields of both regular and direct plans separately.

Under the current regulatory framework for Mutual Funds, various disclosure requirements have been mandated, including disclosures by mutual funds with respect to expenses and risks associated with their schemes.

To facilitate enhanced transparency, ease of comprehension by investors and a standardised approach towards disclosures by the Mutual Fund industry, SEBI has proposed few changes and has sought feedback from industry experts and market participants through a consultation paper issued on Friday.

Market participants and experts can send in their view by October 18.

Currently, Asset management companies disclose expenses, expense ratios, returns and yields of all regular plans on a half-yearly basis. Considering that these parameters are different for both plans, SEBI has proposed that such disclosures on both direct and regular plans be disclosed separately.

SEBI classified investments that are not routed through distributors of mutual funds under direct plan in January, 2013.

Mutual funds cannot charge distribution expenses and commissions on investors of a direct plan. Hence, the expense ratio of the direct plan of any scheme was lower than that of the regular plan of the same scheme. Consequently, owing to the difference in expenses for the direct and regular plans, the returns of the direct and regular plans also vary.

To standardise disclosures, the format for half-yearly financial statements for Mutual Fund schemes will be reviewed and finalised by AMFI, in consultation with SEBI.

Colour codes

To further enhance the pictorial representation of risk, SEBI has proposed to colour-code the risk-o-meter and standardise the format for disclosure of change in risk-o-meters of a Mutual Fund scheme and its benchmark.

The risk-o-meter will have the following different colour codes for six levels of risk: low risk-Irish Green, low to moderate risk-Chartreuse, moderate risk-Neon Yellow, moderately high risk-Caramel, high risk-Dark Orange and very high risk-Red.

Any changes in the risk-o-meter of the scheme or its benchmark should be communicated through a notice cum addendum and via e-mail or SMS to the unit holders of that particular scheme, said SEBI.