If you look closely at the mutual fund advertisements and other scheme related promotional literature in their current form, some significant drawbacks glare out. Although the data related to scheme performance is accurate, performance details are not presented in the most appropriate manner.

But there's a breakthrough on this front now.

At the annual meeting held on January 14, 2017, the Securities and Exchange Board of India (SEBI), made some crucial improvements to the advertising code for mutual funds.

What has change now?
 

• The current practice of showing the 12-month absolute performance of the schemes for last 3 years, will be discontinued. And as per the revised guidelines, the mutual funds will have to depict the returns generated by the scheme on compounded annualised basis—popularly known as CAGR (Compounded  Annual Growth Rate) returns. Therefore, now onwards, mutual funds will disclose CAGR returns for 1-year, 3-year, and 5-year period and will also provide investors with CAGR returns since inception.
• And there is one more change. Presently, the mutual fund schemes are allowed to calculate the returns as on the last day of the quarter immediately preceding the day of advertisement. But now they will have to show returns as on the last day of the month which immediately precedes the advertisement release date.
• Moreover, disclosing the performance of other schemes managed by the same fund manager will be presented in the advertisement.

What is the impact of these modifications on investors?

As the CAGR returns smoothen out returns generated by the scheme, they reflect a real picture of how the fund has fared over a given time period. For example, if a scheme made 15% returns in year one, 2% returns in year two and 38% returns in year three, it would be wise to say that the scheme generated CAGR returns 17.42% returns over the last 3 years. As you may have noticed, it evens out extreme values and depicts the right picture. Needless to say then, choosing a good mutual fund becomes simpler for the investors. Furthermore, using the latest performance data offers a close view of the scheme—a positive from the investors' perspective.

SEBI permits celebrity endorsements

To begin with, no individual fund house will be allowed to rope in celebrities at a fund house or scheme level. In other words, industry body, Association of Mutual Funds in India (AMFI) will advertise for the industry as a whole. It seems the AMFI, as well as mutual fund houses that struggle to utilise funds budgeted for investor education and protection effectively, will now be able to splurge it on celebrity endorsements. Is that the right way to attract customers? No, PersonalFN believes, it is not. But many fund houses in the industry are satisfied with the the capital market regulator's decision approving the AMFI to rope in celebrities to promote mutual fund investments.

Nonetheless, the intent of SEBI to make mutual fund houses more accountable is a step in the right direction. Simple-to-understand data and even simpler presentation of facts would make it easy for potential investors to appropriately assess available options and choose wisely.

If you often struggle to choose a winning mutual fund scheme for your portfolio, you should try out the unbiased mutual fund research services offered by PersonalFN.

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