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Commentary

SEBI Makes Mutual Funds Show Risk in Colours

SEBI has gone from seeing things in black-and-white to now, colour-coded mutual funds. It has, in a circular, asked all mutual funds to colour code their funds blue, yellow or brown according to their risk levels (low, medium or high respectively).

This is a great source of revenue for all the printers that currently print their brochures, memorandums and information booklets. This is not a good day for trees.

Much as I may joke, a concept like this can actually be useful. Once, while filling tax returns, the forms were colour coded, and it made life very easy for all of us. Individuals got one colour, companies another, those with business income in a proprietorship yet another, etc. But that made a difference only since the ENTIRE form was that colour. I doubt having a little square box will make a meaningful difference.

All funds should have a single box with three attributes:

  • long term growth or short term income (or any other combination of the term/goal)
  • objective of the fund like we intend to mortgage your children to pay for our beer, or more realistically “ investment in equity and equity-related securities including equity derivatives of
    top 200 companies by market capitalisation.”
  • The “risk” with the colour box (Low risk, Medium Risk, High Risk) )

My notes:

  • The products will still be mislabelled. Is an FMP that invests in short term corporate debt low or high risk?

  • Investors understand risk in mutual funds. In fact they overestimate it. People tell me mutual funds have high risk, even those that invest in short term g-secs, the lowest risk product available) So I’m not sure who will benefit.

  • I would recommend that such labelling be carried over to all fin products. Insurance, bank deposits and even ETFs (on their web pages). What’s the point of doing this only for Mutual funds?

  • Who prints the stationery really? Are they public?