SEBI to Tighten Disclosures on Expenses, Expense Ratio, Returns, Yields and Risk-o-Meter for Mutual Funds

Oct 01, 2024 / Reading Time: Approx. 6 mins

Listen to SEBI to Tighten Disclosures on Expenses, Expense Ratio, Returns, Yields and Risk-o-Meter for Mutual Funds

00:00 00:00

SEBI to Tighten MF Disclosures on Expenses, Expense Ratio, Returns, Yields and Risk-o-Meter of Mutual Funds

The capital market regulator, the Securities and Exchange Board of India (SEBI), in order to facilitate enhanced transparency, make it easy to understand for investors, and standardise the approach towards disclosures by mutual funds, last week on September 27, 2024, released a consultation paper.

In it certain changes have been proposed that shall help you, the investors make an informed investment decision. Here's what the regulator has proposed.

Disclosure of Expenses, Expense Ratio, Returns of Regular Plan and Direct Plan

Mutual funds, as you may know, are required [under Regulation 59 of SEBI (Mutual Funds) Regulations, 1996] to make half-yearly disclosure of unaudited financial results, which among others include recurring expenses, expense ratios, returns and compounded annualised yield.

At present, this is mandatory for the Regular Plan of mutual fund schemes. But considering that the expense ratio of the Regular Plan and Direct Plan is different, the regulator has proposed that the expenses and the expense ratio of the Direct Plan also be disclosed in standard format.

Notably, mutual fund distributors usually suggest to investors the type of schemes they should consider investing in and often provide a Regular Plan as the default option.

Similarly, there are some investors who seek the services of an investment advisor, who are allowed to recommend only Direct Plan of mutual fund schemes.

Likewise, some investors prefer to invest directly with the fund houses or through online platforms offering Direct Plans.

[Read: 5 Best Active Equity Mutual Funds with Low Expense Ratio And High Returns]

You see, the difference in the expense ratio of the Direct plan and Regular plan of diversified equity mutual funds ranges from 0.4% to 2%, with an average difference of about 1.2%.

Now while a marginal difference may not seem much at the outset, over the longer investment horizon, it does make a difference in the corpus you can build -- thanks to the power of compounding.

Table 1: Difference in Expense Ratio and Impact on Your Wealth

Particulars Direct Plan (in Rs) Regular Plan with 0.5% higher Exp. Ratio (in Rs) Regular Plan with 1% higher Exp. Ratio (in Rs)
Amount invested 10,00,000 10,00,000 10,00,000
Value after 30 years 29,959,922 26,196,666 22,892,297
For illustration purposes only.

The table above illustrates how a small difference in the expense ratio could weigh on the corpus. At the end of a 30-year period, the corpus under the Direct plan would have appreciated to nearly Rs 3 crore in the example above.

[Read: Direct vs Regular Plan: Can Expense Ratio Make Significant Difference to Your Mutual Fund Returns?]

Considering these finer points, which often investors overlook, the regulator vide the consultation paper has also proposed that mutual fund houses make separate disclosure returns during the half year and compounded annualised yields for both Regular Plan and Direct Plan.

To standardise the above disclosures, it is said that the format for half-yearly financial statements for mutual fund schemes shall be reviewed and finalised by the Association of Mutual Funds in India (AMFI), in consultation with SEBI.

Enhanced Disclosure of Risk-o-meter:

The regulatory guideline makes it mandatory for mutual funds to depict the risk of the scheme through a pictorial illustration of a meter, called the Risk-o-meter.

SEBI introduced the Risk-o-meter in July 2015, as a replacement to its earlier colour code labelling. All mutual funds are now mandated to publish a Risk-o-meter at the beginning of all scheme-related documents.

The current Risk-o-meters provides a visual description of the risk involved in a scheme, ranging from low, low to moderate, moderate, moderately high, high, and very high.

To further enhance the pictorial representation of risk, it is proposed by the regulator that the Risk-o-meter should be colour-coded as low risk in Irish Green, low to moderate risk in Chartreuse, moderate risk in Neon Yellow, moderately high risk in Caramel, high risk in Dark Orange, and very high risk in Red.

For illustration purposes only
(Image source: SEBI Consultation Paper, September 27, 2024)

For example, as illustrated above, the risk depicted by the Risk-o-meter in the above case is, moderately high.

[Read: Are You Setting Your Risk-Return Expectations Right While Investing in Mutual Funds?]

If there is any change in the Risk-o-meter, the regulator has proposed that this should be communicated to the unitholders of that particular scheme by way of a Notice cum Addendum as well as an e-mail or SMS.

To standardise the format of the disclosure and for ease of understanding of the change in the level of risk for unitholders of that particular scheme, the regulator has also proposed that mutual funds shall disclose the existing Risk-o-meter along with the revised Risk-o-meter (adjacent to existing one).

At present, the SEBI's consultation paper is open for public comments. The comments or suggestions can be submitted latest by October 18, 2024, through this link-
https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComments=yes.

At PersonalFN, we believe that given that individual investors are gradually choosing the Direct Plan of mutual funds, and for the Risk-o-meter to truly depict the risk a scheme carries with meaningful colour codes, the regulator has taken steps in the right direction in the interest of investors to make an informed choice.

SEBI is continually taking measures for the well-being of investors at large with constructive feedback from the Indian mutual fund industry.

Nevertheless, ensure that you are investing in mutual funds considering your age, risk profile, broader investment objective, envisioned financial goals, and time in hand before those goals befall by following a sensible asset allocation rather than investing in an ad hoc manner.

If you have any doubt about selecting suitable mutual fund schemes for your portfolio (or any other investment product for that matter), don't hesitate to seek the help of SEBI-registered investment advisors who can guide you throughout your investment journey.

Be a thoughtful investor.

Happy Investing!

Join Now: PersonalFN is now on Telegram. Join FREE Today to get PersonalFN’s newsletter ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds.


ROUNAQ NEROY heads the content activity at PersonalFN and is the Chief Editor of PersonalFN’s newsletter, The Daily Wealth Letter.
As the co-editor of premium services, viz. Investment Ideas Note, the Multi-Asset Corner Report, and the Retire Rich Report; Rounaq brings forth potentially the best investment ideas and opportunities to help investors plan for a happy and blissful financial future.
He has also authored and been the voice of PersonalFN’s e-learning course -- which aims at helping investors become their own financial planners. Besides, he actively contributes to a variety of issues of Money Simplified, PersonalFN’s e-guides in the endeavour and passion to educate investors.
He is a post-graduate in commerce (M. Com), with an MBA in Finance, and a gold medallist in Certificate Programme in Capital Market (from BSE Training Institute in association with JBIMS). Rounaq holds over 18+ years of experience in the financial services industry.


Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes. Use of this information is at the user's own risk. The user must make his own investment decisions based on his specific investment objective and financial position and use such independent advisors as he believes necessary.

PersonalFN' requests your view! Post a comment on "SEBI to Tighten Disclosures on Expenses, Expense Ratio, Returns, Yields and Risk-o-Meter for Mutual Funds". Click here!

Most Related Articles

Which FMCG Mutual Fund is Right for You? Nippon India Consumption Fund vs Canara Rob Consumer Trends Fund FMCG mutual funds have emerged as attractive investment options for investors seeking to capitalize on the growth potential of the FMCG sector.

Oct 04, 2024

All You Need to Know About SEBI’s Mutual Fund Lite and New Asset Class Framework In its Board meeting on Sept 30, 2024, SEBI introduced two significant regulatory frameworks aimed at reshaping the mutual fund industry.

Oct 01, 2024

Highest Return Mutual Funds in the Last 10 Years - Large & Mid Cap Fund Category Large and Mid Cap Funds represent a unique multi-cap investment strategy that allows investors to diversify their holdings among both large and mid-sized companies.

Oct 01, 2024

Top Performing SWP Mutual Funds in 2024 SWP is a smart approach for mutual fund investors looking for consistent income without liquidating their entire portfolio.

Sep 30, 2024

Debt Fund of Funds: Mutual Funds Finding a Way to Offer Tax-Efficient Solutions HDFC Mutual Fund and Aditya Birla Sun Life Mutual Fund are seeking the capital market regulator’s nod to launch HDFC Debt Advantage Fund of Funds and Aditya Birla Sun Life Income Optimiser Fund of Funds.

Sep 30, 2024

Most Popular

Manufacturing Mutual Funds Shine. Are they Worthy of Your Investment Portfolio?Currently contributing around 17% to the GDP, the manufacturing sector is expected to grow to 21% in the next 6-7 years.

May 06, 2024

6 Equity Mutual Funds to Benefit from India’s Defence SectorThe potential to benefit by sensibly taking exposure to defence sector stocks is huge!

Apr 17, 2024

Top 5 Mutual Funds with High Exposure to EV RevolutionThis article will evaluate the top mutual funds to invest in 2024 that have a high allocation to EV stocks.

Feb 06, 2024

Top 5 Mutual Funds That Are Betting on the Manufacturing BoomThis article will evaluate the top mutual funds to invest in 2023 that have a high allocation to Manufacturing stocks.

Sep 01, 2023

HDFC Mutual Fund launches HDFC Manufacturing FundHDFC Mutual Fund launches HDFC Manufacturing Fund

May 08, 2024