 "SEBI raises bar on disclosure and transparency at mutual fund houses")
Compare current value with cost of purchase: At present the consolidated account statement (CAS) provides the names of the schemes, the number of units held, and their market value. Now the document will also tell how much has been invested to date in each scheme. Investors will be able to tell at a glance how much money they have put in, and how much those investments are worth today.
Financial experts, however, warn against investors misconstruing this information. Suppose that you have done an SIP of Rs 5,000 for 12 months and you find that the current worth of your investments is Rs 63,000. Some investors may think that their investments have appreciated by only 5%. But your actual appreciation would be higher since you put in money at different points of time: a part 12 months ago, another part 11 months ago, and so on.
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In case of long-term investments like equities and balanced funds, if the current value of investments is lower than the total sum invested even after a year or two, which is quite possible during a bear market, investors may want to exit the investment, whereas they actually need to continue with their SIPs to benefit from a downturn. “Such information should be accompanied by an educational statement from the fund house that investors should stick to their investments in long-term, equity-oriented products,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
Know the fee you are paying to distributor and fund house: The half-yearly CAS will henceforth provide the investor information on the actual commission paid by the AMC to distributors (in absolute rupee terms) during the past six months against his total investment in each scheme. Besides direct monetary payments, fund houses will also have to include information on payments made as gifts or rewards, trips, event sponsorship, etc. The average total expense ratio for the half-year period will also have to be revealed.
At one place the investor will be able to see how much he has invested, how much he is paying the fund house for managing his money, and how much he has paid to the distributor for his services.
Some financial advisors feel that making this information available will curb mis-selling. “Now that information on distribution commission will be available upfront to investors, distributors will think twice before selling unsuitable products to investors only for the higher cuts they offer,” says Ankur Kapur, founder, ankurkapur.in.
Again, the risk in such disclosures is that when returns are negative in a particular year, some investors may feel that they shouldn’t be paying such charges to the fund house and the distributor, and may want to exit. “Investors must understand the long-term benefits of volatile products like equities and not compare them to products like bank fixed deposits where the returns are linear but lower,” says Dhawan.
Take informed decisions with more information: The scheme information document and the key information memorandum (KIM) will now contain the following information: tenure of fund manager, scheme’s top 10 sector and stock holdings, expense ratio of underlying scheme in fund-of-funds, turnover ratio, and impact of expense ratio. “Most investors are focused only on the outcome, that is, the returns. Information like this will help them lift the hood and understand the mechanics of how mutual funds work,” says Dhawan.
While it is a positive move on the part of the regulator to make all this information available, investors need to interpret it correctly (see box). Moreover, they need to compare information about a particular fund against the average level for that category. For instance, it is not enough to know a fund’s expense ratio. An investor needs to compare it with the category average to be able to say whether the fund is expensive or cheap. Such information is usually available on the web sites of fund rating agencies. “It will be easier for financial advisors to discuss with their clients the risks in a fund, whereas currently choices are made mostly on the basis of returns,” says Kapur.
Shorter, more readable SID and KIM: Consolidated SIDs are voluminous documents. SID and KIM for individual funds will make these documents shorter and more readable.
Lowering the risk of defaults: Currently, balance sheets of many corporates are heavily leveraged and the risk of defaults and downgrades is growing. A couple of fund houses have already suffered on this count. The regulator wants fund houses to develop their own independent capability for assessing the risk of lending to corporates, instead of relying on a third party.
Reveal soft dollar arrangements: While SEBI has not banned soft dollar arrangements, it has stipulated that they should only be entered into if they are in the investor’s interest. It has also made it mandatory that all such arrangements should be disclosed.
What these five parameters mean for you
* Top 10 holdings: Which were the fund manager’s top sector and stock bets? And did they translate into alpha?
* Expense ratio of FoFs: You pay two layers of cost in a fund-of-funds. Is it worthwhile?
* Turnover ratio: Higher turnover generates higher costs, so be wary of it. Tells you whether a fund manager picks stocks based on careful research, or indulges in short-term trading and rides momentum.
* Total expense ratio: Total fee you pay to fund house. Lower is better, unless higher cost is justified by higher return.
* Fund manager’s tenure: If the returns of the fund are high, but the fund manager who generated them is no longer at the helm, the track record loses much of its meaning.