Sebi proposes mandatory disclosure of risk-adjusted returns for mutual funds

Sebi has also proposed a methodology for the calculation of the information ratio for different categories of mutual fund schemes.
Sebi building use for representative purposes
Sebi building use for representative purposes(File Photo | PTI)

MUMBAI: To help investors make informed investment decisions and also to limit the scope for mis-selling, the markets regulator Securities and Exchange Board (Sebi) wants mutual funds to mandatorily disclose the risk-adjusted return from their scheme portfolio along with the return of a fund scheme.

Risk-adjusted return (RAR) of a scheme represents a more holistic measure of the scheme's performance as it quantifies the amount of return generated by a mutual fund scheme for each unit of risk taken to achieve that return.

The extant regulations do not mandate the disclosure of RAR along with the returns of an MF scheme. Further, there is no uniform practice followed by asset management companies (AMCs) regarding disclosure of RAR of their scheme.

The return on investment is a major factor attracting investors to invest in any mutual fund scheme and is highlighted by fund houses while marketing respective schemes.

The suggestion comes in a consultation paper issued Friday. Sebi has sought comments from the public till July 19 on these proposals.

“Considering the significance of volatility of performance in determining the suitability of fund schemes, it is desirable that the RAR of the scheme is disclosed along with disclosure of its scheme performance,” Sebi said in its consultation paper.

"Information ratio (IR) is an established financial ratio to measure the RAR of a scheme portfolio. It is often used as a measure of a portfolio manager's level of skill and ability to generate excess returns relative to a benchmark, and it also attempts to identify the consistency of the performance by incorporating a tracking error or standard deviation component into the calculation," the paper said.

To bring uniformity across different funds, Sebi has also proposed a methodology for the calculation of the information ratio for different categories of mutual fund schemes.

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