Product labeling has a few discrepancies, but is mostly falling in place...
23-Jul-2013 •Research Desk
In March, 2013, Sebi introduced Product Labelling using colour codes, which came into effect from July 1, 2013. The colour codes, as per Sebi, will provide investors an easier way to assess the risk associated with a particular scheme and check mis-selling. The three colour codes are:
Blue - principal at low risk
Yellow - principal at medium risk
Brown - principal at high risk
We analysed the colour codes of all the open-ended funds with the Value Research fund classification, to evaluate how closely these match our classification.
Some categories have funds with different colour codes depicting a different risk profile (higher or lower) than the dominant colour conformed by most (See: Exceptions). There are a few red flags, with a few funds following codes that indicate they are less risky in their peer group, when they are not (See: Red Flags). There are other interesting observations:
1) All the AMCs, except for Escorts Mutual Fund have implemented the coding for most of their schemes.
2) All the funds under our broad Equity categories -- based on market capitalisation of the securities held (Large-cap, Large- and mid-cap, Multi-cap, Mid- and small-cap) or theme-based (Tax-planning, International) or sector-based (Banking, FMCG, Pharma, Technology) are colour coded as brown.
3) There is only 1 Equity fund under the Equity: Infrastructure category -- IDFC Infrastructure which is coded as yellow; rest 21 are coded as brown.
4) Similarly, all the funds under our Debt : Liquid category are colour coded as blue.
5) There are 4 Balanced funds which are colour coded as yellow -- Canara Robeco Balanced, LIC Nomura MF Balanced, LIC Nomura MF ULIS and Templeton India CAP Gift Plan. Remaining 24 have gone for a higher risk code depicted by brown colour.
6) Under Hybrid-Debt-Oriented Conservative category, ICICI Pru Blended Plan B is the only fund with the least risk, coded as Blue.
At best, the colour code can be used as the first step to understand the risk associated with it. However, by no way does it indicate that two funds following the same colour code are similar. The Value Research fund classification comes in handy to objectively compare two funds. Moreover, investors should evaluate a fund based on several other quantitative and qualitative factors such as performance, fund managers and more before investing in them to meet their financial needs.
• Equity: Infrastructure> Despite a mandate of minimum 80 per cent exposure to equity and related instruments, IDFC Infrastructure has chosen a yellow code instead of brown
• Gold: Funds
Two AMCs -- Axis Mutual Fund (2 funds) and IDBI Mutual Fund (2 funds) have chosen a yellow code instead of brown
• Hybrid: Asset Allocation
FT India Dynamic PE Ratio FoF with a 100 per cent equity mandate has chosen yellow, instead of brown
• Hybrid : Debt-oriented (Conservative)
ICICI Pru Blended Plan B has the mandate to go down to 0 per cent (and up to 49 per cent) in equity and related instruments. It is coded blue instead.
• Hybrid : Equity-oriented
2 funds from LIC Mutual Fund - LIC Nomura MF Balanced and LIC Nomura MF ULIS have a minimum allocation of 60 per cent to equity. Yet are colour coded as yellow instead of brown