Mandatory display of risk-adjusted return for all MF schemes, a double-edged sword

The capital market regulator SEBI’s move to highlight risk adjusted return of all mutual fund schemes is expected to help investors take informed decision even while adding complications in selection of right fund for investment by retail investors.

Currently, return on investment is a major factor attracting investors to invest in any MF scheme and it is highlighted by the MFs, while marketing respective schemes.

Sapna Narang, Managing Partner, Capital League said two funds could give same return over a year, but the fund with extreme volatility implies higher risk for investors.

The RAR of a scheme portfolio represents a more holistic measure of the scheme’s performance because it quantifies the amount of return generated by a MF scheme for each unit of risk taken to achieve that return, said SEBI in a consultation paper. Investors can send in their comments by July 19.

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Though AMCs display RAR for few schemes, they do not follow a uniform method for calculation of. This apart, there are no consistency in the frequency of disclosure and uniformity in NAVs used for calculation.

“An investor can make an informed decision if information on RAR is known. Higher disclosure will help to increase investor confidence and loyalty towards the mutual fund industry,” said Narang.

Amid variety of equity, hybrid and debt schemes, dIsplaying RAR will further confuse retail investors and mutual fund will become more complicated, said R Anath, a MF investor.

MFs will be mandated to disclose the Information Ratio of a scheme portfolio along with the return of its respective benchmark, said SEBI putting out details on the measures to arrive at RAR.

Prof Kapil Pandla Dean, Sharda School of Business Studies said despite the popularity of MFs, many investors lack a clear understanding of the associated risks as they report only nominal returns.

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Besides the benefit of transparency, RAR also strokes concerns including the complexity of these measures for average investors, potential misinterpretation and the impact on investor confidence and market dynamics, he said.

Nirav Karkera, Head of Research, Fisdom said the concept of publishing RAR of schemes is not novel enough to stir the pot to a significant degree as most of the advisors already consider it before enabling investment decisions.

However, he added when implemented in totality it could bring in uniformity in the way select risk-adjustment metrics are computed and enable effective comparison across schemes to empower market participants to take informed decision.

Feroze Azeez, Deputy CEO, Anand Rathi Wealth said RAR is the only way to properly evaluate a portfolio or fund manager and it is great to see progress in this direction. I

In India, people refer alpha to the difference between return of the fund and the benchmark while in the US, alpha always implies to RAR, he added.