SEBI’s New Proposal: Mandatory Disclosure of Risk-Adjusted Returns for Mutual Funds
The Indian capital market regulator, SEBI (Securities and Exchange Board of India) has released a consultation paper stating that apart from returns, mutual funds have to show risk-adjusted returns.
SEBI has stated in its consultation paper that the Risk-Adjusted Return (RAR) of a scheme portfolio is a true measure of a scheme’s performance that is “better” than before because it measures the amount of return earned by an MF scheme for each unit of risk assumed to obtain that return.
SEBI noted that however, quite a few fund houses disclose RAR and the way of computation of RAR differs from one fund house to another. Also, it made the crucial note that not all houses report RAR figures. For example, it noted that out of the 39 fund houses that have equity schemes in the country only 33 of them reveal RAR. Among the 36 fund houses with multi-plan schemes also known as hybrid schemes, only 27 disclose their RAR (risk-adjusted return) numbers.
The regulator has now proposed to make this particular aspect mandatory again. To take the levels of transparency and standardization to further heights, the consultation paper has recommended the Information Ratio (IR), to be the standardized risk-adjusted ratio that is required to be disclosed. The IR is defined as the Tracking Difference (TD) to the Tracking Error (TE) of the scheme portfolio for a particular period. Although the TD reflects the measure of the excess return of the portfolio against the benchmark, the standard deviation of the excess return is referred to by TE. Thus, the IR shows the amount of extra return of the fund for each unit of risk assumed.
IR disclosure might be required in all public domains, these include a mutual fund’s website, SID and others, and the website of AMFI. SEBI has suggested that the schemes that are of gestational period of less than six months do not have to publicly reveal their IRs.
The proposal is another disclosure and elaborates on SEBI’s concern of establishing the level of risk that investors are willing to take over the returns that an investment earns.
