New Delhi: Capital markets regulator Sebi on Friday proposed mandatory disclosure of 'risk-adjusted return' along with the return of a mutual fund scheme to help investors make informed investment decisions.
The risk-adjusted return (RAR) of a portfolio of schemes represents a more holistic measure of scheme performance because it quantifies the amount of return generated by a mutual fund scheme for each unit of risk taken to achieve that return.
The current regulatory framework does not require disclosure of the RAR along with the returns of an MF scheme.
Furthermore, asset management companies (AMCs) do not follow a uniform practice regarding the disclosure of their plan's RAR.
Return on investment is an important factor that attracts investors to invest in any MF scheme and AMCs highlight this while marketing the respective schemes.
Considering the importance of performance volatility in determining the suitability of MF schemes, it is desirable that the RAR of the scheme be disclosed along with the disclosure of scheme performance, Sebi said in its consultation paper.
"The information ratio (IR) is a financial ratio established to measure the RAR of the plan's portfolio. It is often used as a measure of the level of skill and ability of a portfolio manager to generate excess returns relative to a point and also attempts to identify consistency of performance by incorporating a tracking error or standard deviation component into the calculation," he added.
To achieve uniformity among different MFs, Sebi has also proposed a methodology for calculating IR for different categories of mutual fund schemes.
The Securities and Exchange Board of India (Sebi) has sought public comments until June 28 on the proposals.
The risk-adjusted return (RAR) of a portfolio of schemes represents a more holistic measure of scheme performance because it quantifies the amount of return generated by a mutual fund scheme for each unit of risk taken to achieve that return.
The current regulatory framework does not require disclosure of the RAR along with the returns of an MF scheme.
Furthermore, asset management companies (AMCs) do not follow a uniform practice regarding the disclosure of their plan's RAR.
Return on investment is an important factor that attracts investors to invest in any MF scheme and AMCs highlight this while marketing the respective schemes.
Considering the importance of performance volatility in determining the suitability of MF schemes, it is desirable that the RAR of the scheme be disclosed along with the disclosure of scheme performance, Sebi said in its consultation paper.
"The information ratio (IR) is a financial ratio established to measure the RAR of the plan's portfolio. It is often used as a measure of the level of skill and ability of a portfolio manager to generate excess returns relative to a point and also attempts to identify consistency of performance by incorporating a tracking error or standard deviation component into the calculation," he added.
To achieve uniformity among different MFs, Sebi has also proposed a methodology for calculating IR for different categories of mutual fund schemes.
The Securities and Exchange Board of India (Sebi) has sought public comments until June 28 on the proposals.
