On November 5, 2024, the Securities and Exchange Board of India (SEBI) issued Circular which introduces significant updates to mutual fund disclosures aimed at enhancing transparency, investor comprehension, and standardization across the industry. These changes, scheduled to take effect on December 5, 2024, address three main areas: expense and returns disclosure, a new color-coded risk-o-meter, and a standardized format for communicating risk level changes.
Enhanced Disclosure of Expenses, Half-Yearly Returns, and Yield
One of the most significant updates in SEBI’s circular is the requirement for mutual funds to separately disclose expenses, returns, and yield for direct and regular plans. Historically, mutual funds have offered two types of plans: direct plans, which allow investors to bypass distributors and thus have lower fees, and regular plans, which include distributor commissions. This difference in fees often leads to higher returns for direct plans, and SEBI’s new directive aims to ensure that investors are fully informed about the cost and return distinctions between these two types.
Under the updated framework, mutual funds will be required to provide separate disclosures for total recurring expenses in both direct and regular plans. Additionally, half-yearly returns and compounded annualized yields will be shown separately for each plan. This enhanced transparency allows investors to make more informed decisions by comparing the costs and returns associated with each option. To ensure consistency across the industry, the Association of Mutual Funds in India (AMFI) will work with SEBI to finalize a standardized format for these half-yearly financial statements.
Color-Coded Risk-o-Meter for Easy Risk Identification
SEBI has also introduced a color-coded risk-o-meter as part of its efforts to make risk disclosures more intuitive for investors. The risk-o-meter, which has six levels from “Low” to “Very High,” will now incorporate a specific color scheme for each level. For instance:
Low Risk: Irish Green (#08A04B)
Low to Moderate Risk: Chartreuse (#7FFF00)
Moderate Risk: Neon Yellow (#FFFF33)
Moderately High Risk: Caramel (#C68E17)
High Risk: Dark Orange (#FF8C00)
Very High Risk: Red (#F70D1A)
This visually distinct labeling makes it easier for investors to grasp a fund’s risk profile quickly. The new color scheme will apply to all digital and printed promotional materials, making it a standardized tool for risk assessment across the industry.
Standardized Disclosure of Risk Level Changes
To further streamline risk communication, SEBI has mandated that any change in a scheme’s risk level must be communicated to unitholders in a standardized format. This includes providing both the previous and updated risk levels to highlight any shifts in the scheme’s risk profile. Notifications about such changes will be sent through a “Notice cum Addendum,” as well as via email or SMS to unitholders. This approach ensures that investors remain informed of changes that could impact their investment decisions.
Implications for Investors and the Industry
SEBI’s updated disclosure requirements represent a major step forward in terms of transparency and investor protection. By clearly separating the expenses and returns for direct and regular plans, SEBI empowers investors to better understand the cost structure of their investments. The color-coded risk-o meter adds a new layer of visual clarity, helping investors to make risk-aligned investment choices. Finally, the standardized communication of risk level changes reinforces the regulator’s commitment to keeping investors informed about potential risks associated with their mutual fund investments.
Overall, these changes reflect SEBI’s ongoing efforts to align the mutual fund industry with global best practices in investor transparency and protection. The standardized, detailed disclosure framework will likely foster greater trust among investors and encourage more informed investment behavior.
