SEBI paper seeks mandatory disclosure of 'risk-adjusted return' by mutual funds

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.

Risk-adjusted return (RAR) of a scheme portfolio represents a more holistic measure of the scheme's 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 mandate the disclosure of RAR along with the returns of an MF scheme.

Further, there is no uniform practice followed by asset management companies (AMCs) regarding disclosure of RAR of their scheme.

The return on investment is a major factor attracting investors to invest in any MF scheme and is highlighted by the AMCs while marketing respective schemes.

Considering the significance of volatility of performance in determining the suitability of MF schemes, it is desirable that the RAR of the scheme is disclosed along with disclosure of its scheme performance, SEBI said in its consultation paper.

"Information Ratio (IR) is an established financial ratio to measure the RAR of the scheme portfolio. It is often used as a measure of a portfolio manager's level of skill and ability to generate excess returns relative to a benchmark, and it also attempts to identify the consistency of the performance by incorporating a tracking error or standard deviation component into the calculation," it added.

To bring uniformity across different MFs, SEBI has also proposed a methodology for the calculation of IR for different categories of mutual fund schemes.

The Securities and Exchange Board of India (SEBI) has sought comments from the public till July 19 on the proposals.