Scrolling through my phone messages or gmail account, I often marvel at the miraculous financial products and services that are today available to us Indians.
One SMS plugs a 'savings' product that urges me to 'earn ₹1.35 lakh a month plus a guaranteed money-back benefit of ₹41,000' if I can just manage to invest ₹4400 a month. Another missive invites me to 'double my investment in three years' by investing in penthouse apartments at the outskirts of Chennai.
There are also anonymous tips from an unknown benefactor who invites me to invest ₹1 lakh in a stock option strategy and earn ₹3-5 lakh as profit. I only need to share 35 per cent of that profit with him (her?)!
I invest quite a bit in equity mutual funds and some of my initial investments in equity funds have multiplied my money 30 times or even 40 times over the years. But I know I will never find this advertised, amid the bunch of wildly fanciful sales pitches for other financial instruments.
Forget unsolicited SMSes. Can you think of one memorable ad for a mutual fund on TV or in print? Probably not. All the mutual fund ads are so dreadfully boring that you would seldom even take a second look at one.
Insurance companies put out sentimental ads on TV showing widowed wives marrying off their children in grand style, thanks to LIC. Or there are seniors whooping it up in Maldives thanks to a pension plan. But we all know what kind of returns these plans actually give.
SEBI will probably take this lack of fanfare from the MF industry, as a sign of a job well done. The market regulator imposes such an elaborate and strict advertising standard on the industry that leave alone tall promises, funds don't even get to talk about their actual track record in glowing terms. (This is not to say that mutual funds are never mis-sold. They are, verbally. But they are seldom mis-sold through public advertisements or in writing).
Reading through SEBI's advertising code for mutual funds will tell you why mutual fund houses seldom try to advertise their returns, however good they may be. Some of SEBI's requirements for MF ads are:
- If a scheme has existed for three years or more and wants to advertise performance, it must give both a point to point return on ₹10,000 and a CAGR, for easy understanding.
- The ad must give returns for 'as many 12 month periods as possible' from the scheme's inception, until the last day of the 'calendar quarter preceding the date of the advertisement'. And it must also provide benchmarks for comparison.
- Any ad on MF returns must only talk of quarterly, half yearly, annual returns on a calendar basis.
- If a scheme's returns are being advertised, the fund must also provide returns of all other schemes being managed by the same fund manager in the same ad.
All this is apart from the mandatory long-winded disclosure on 'Mutual Funds are subject to market risks...etc etc".
With so many rules and regulations governing a mutual fund scheme looking to advertise its track record, it is surely no wonder that few fund houses really venture to advertise at all.
This is why most MF ads turn out to be so generic and thoroughly unimaginative. They either ask you blandly to go for Systematic Investment Plans or talk in vague and general terms of the 'long term' benefits of equity investing.
Share of wallet
Without a doubt, SEBI's vigilance in regulating every aspect of the mutual fund industry from its inception, so that investor interests always take priority, is to be commended. It is due to the regulator's efforts to allow no loophole for exploitation of investors, that MF products remain relatively free of the rampant mis-selling that today characterises insurance selling or even broking.
But it must also be recognised that the Indian mutual fund industry does not exist in a vacuum. It has to actively compete with a host of other financial products (not to forget the super-aggressive e-commerce sites) for a share of the consumer's wallet.
To get a fair shot at the consumer's wallet, fund houses need to be able to talk about their track record in simple and clear terms, without being saddled with a whole host of rules how they should calculate returns, whether they should be for calendar or fiscal year, whether other schemes have fared well and so on.
Barring celebrity endorsements and mandating that funds provide their track records for reasonably long periods of time are desirable rules. So is requiring funds to provide benchmark returns for comparison when they advertise. But as for the rest of the content in SEBI's MF advertising code, they are best done away with. Let individual MF advertisers judge the content of their ads.
Yes, it would be ideal if all financial products could be made to adhere to SEBI's stringent rules when making marketing pitches to their investors. Or if other regulators took a leaf out of SEBI's books to frame a similar ad code. But this is unlikely to happen in the foreseeable future.
Therefore, it appears best to accept that we live in a less than ideal world and to allow MFs to blow their own trumpet, if their performance gives them something to talk about.