Business: Capital markets regulator Sebi on Friday proposed mandatory disclosure of ‘risk-adjusted return’ along with returns of a mutual fund scheme to help investors make informed investment decisions. The risk-adjusted return (RAR) of a scheme portfolio represents a more holistic measure of a scheme’s performance as it measures 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 disclosure of RAR along with returns of an MF scheme. Moreover, no uniform practice is followed by asset management companies (AMCs) with respect to disclosure of their scheme’s RAR. Return on investment is a major factor attracting investors to invest in any MF scheme and is highlighted by AMCs while marketing the respective schemes. Given the importance of volatility of performance in determining the suitability of MF schemes, it is desirable that the RAR of a scheme is disclosed along with the disclosure of its scheme’s performance, Sebi said in its consultation paper.
It said, “The Information Ratio (IR) is an established financial ratio to measure the RAR of a scheme portfolio. It is often used as a measure of the level of skill of the portfolio manager and his ability to generate excess returns relative to the benchmark, and it also attempts to identify consistency of performance by incorporating the tracking error or standard deviation component in the calculation.” To bring uniformity across 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 comments from the public by July 19 on the proposals.
