Color Bias

Posted On Friday, Jul 12, 2013

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Yes, we discriminate on the basis of colour.


The biggest question investors often face is - in which Mutual Fund should we invest?


Let’s try and answer that question. You can invest in Equity, Debt, Gold funds, open ended and close ended funds, actively managed or passively managed funds, Hybrid funds, balanced funds, FMP, MIP and SIP, tax saving and fund of funds… phew, the list seems endless.


Coming back to the question, in which Mutual Fund should we invest? We have two options here:


1.The tougher way –

Roll up your sleeves and do your research, use the internet and sites which gives you more information on the past performance and history of the fund, the fund manager’s style of investing, portfolio construction etc. and then take an informed decision .


2.The easier way –

speak to your friend, family or your parivaar ke jaisa friendly neighborhood financial advisor and blindly invest where they indicate.

If you follow step 2, there is another step added, clasp your hands, close your eyes and pray to the almighty that the investment vehicle you have chosen is right for you and leads you to your goal and not drain your hard earned savings.


Given the crazy schedules we all have today, who would go in for the first option? Not many. SEBI recognized the fact that most people may opt for Option 2 due to time constraints, hence it has prescribed a framework on 'Product Labeling' with colour coding for mutual funds effective from 1st July, 2013, for all existing and forthcoming schemes. This is done to ensure that when you put your signature on the form, you know what you are getting into.


There are 3 categories as prescribed by SEBI namely Blue, Yellow and Brown depending upon the risk to which your invested principal is exposed.


A blue colour coded box would indicate principal at low risk, yellow would signify a principal at medium risk, while brown would represent principal at high risk. The colour codes shall also be described in text beside the colour code box.


We had introduced colour coding for mutual funds to you in March 2013. Most of the fund houses have rolled this out wherever a particular mutual fund product is being advertised.


While the intent of this ‘discrimination’ by SEBI is noble. We think that in an effort to keep the colour coding simple for the retail investor and the distributor, the product labeling has lost out on the qualitative aspect. For example, a large cap, a multi cap as well as a sectoral equity fund will all be colour-coded brown but the risks for each of these categories under the same equity asset class is different. A Sector fund is comparatively a more risky product as compared to the other two.


Moreover there is no differentiation between schemes of same asset class of different fund houses and that the colour coding does not consider the scheme's past track record or it’s fund manager's ability to control risks or portfolio churning. A common yardstick, something akin to a commoditised approach ideally should not be used where the fund management capability is being evaluated and virtually graded.


To address some of these issues, additional grading could have been introduced. For instance, while an equity scheme can be depicted as brown, different shades of brown or stars of brown could have been used to denote the different levels of risk, with an additional clarification from the fund house to justify the particular shade or star.


Moreover this move could have effectively handled mis-selling in terms of a mismatch between the risk profile of the product vis-à-vis that of the investor, which unfortunately is not being achieved in the current stipulation.


While this initiative taken by SEBI is definitely a step in the right direction from the point of view of the new investor looking to start investing for the first time but for those of us who know the importance of asset allocation and risk mitigation this grading system might prove to be inadequate since it does not capture the various kinds of funds in each category.


Read SEBI’s circular on Product Labeling.


Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article constitute only the opinions and do not constitute any guidelines and recommendation on any course of action to be followed by the reader. The views are meant for general reading purpose only and are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the readers. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. Recipients of this information should rely on information/data arising out of their own investigations. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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