SEBI prescribes risk-based labelling for mutual fund products
19 Mar 2013
The Securities and Exchange Board of India (SEBI) has prescribed a labelling scheme for mutual fund products that would provide investors an easy understanding of the kind of products they are investing in. This is being done to address the issue of mis-selling, SEBI said.
The SEBI guidelines are based on the recommendations of a committee set up to examine the system of product labelling that would provide investors an easy understanding of type or category of product or scheme.
SEBI has suggested colour coding of mutual fund products and schemes based on the various parameters such as nature of the scheme, investment objective as also the attendant risks.
SEBI said all mutual funds should 'label' their schemes `blue', `yellow' or `brown' on the basis of the parameters such as the nature of scheme – wheaher to create wealth or provide regular income and the indicative time horizon into short-, medium- and long-term; the investment objective (in a single line sentence) followed by the kind of product - whether equity or debt - in which the investor is investing.
The level of risk should be depicted by colour code boxes as under:
- Blue – principal at low risk.
- Yellow – principal at medium risk.
- Brown – principal at high risk.
The colour codes should also be described in text beside the colour code box.
There should also be a provision for a disclaimer that investors should consult their financial advisers if they are not clear about the suitability of the product.
SEBI said the product label should be disclosed in the front page of the initial offering application forms, key information memorandum (KIM) and the scheme information documents (SIDs).
Mutual funds should label products in such a way that the product information and the product label are in proximity allowing the investor to have easy access to information about the scheme.
Scheme advertisements should also placed in a manner so as to be prominently visible to investors.
The new guidelines are applicable from 1 July 2013, to all the existing schemes and all schemes to be launched on or thereafter. However, mutual funds may choose to adopt the provisions of this circular before the effective date, SEBI said.