New guidelines on MF labelling in the works

After overhauling the investment framework for multicap schemes, the Securities and Exchange Board of India (Sebi) is working on the new guidelines for calculation and labelling of risks for various categories. Sources said Sebi could introduce one more category which could be termed ‘extreme’ or ‘very high’ risk to help warn investors investing in these instruments.

After overhauling the investment framework for multi-cap schemes, the Securities and Exchange Board of India (Sebi) is working on new guidelines for calculating and labelling risks for various categories.

Depending on the risk profile, MF schemes are currently divided into five buckets, ranging from ‘low risk’ to ‘high risk’. People in the know said Sebi could introduce another category that could be termed ‘extreme’ or ‘very high risk’, to help warn investors.

The people said that on the equities side, schemes with very high exposure to the small-cap universe could be placed in this category. On the debt side, credit risk funds and schemes with high exposure to corporate paper could be labelled ‘extremely risky’.

“Sebi is working on new parameters for product labelling. It could introduce new investment categories and risk labels,” said a regulatory official. The move to introduce the ‘extreme risk’ category for debt schemes was triggered by Franklin’s windup move.

“There is scope to improvise and fine-tune the current norms. A lot of MF investors still don’t fully understand the risk. Many still believe investing in debt schemes is riskfree,” said the official.

The concept of product labelling for the MF industry was introduced in 2013. Over the years, Sebi has been making changes to the framework. In the beginning, schemes had to be colour-coded in green indicating ‘low risk’ and red denoting ‘high risk’.

Later in 2015, Sebi did away with the colour codes and introduced the ‘risk-o-meter’ — a large graphical indicator depicting the risk level, based on the perceived risk for the principal investment amount.

Sebi is said to be taking feedback from industry body Amfi and others to help investors take educated bets. Sebi has been asking Amfi to underscore investment risks in its advertisements.

Separately, reports suggest Amfi has written to Sebi on various options MFS can choose to avoid large-scale rebalancing of multi-cap schemes. Among the options, the industry has asked for a new category called ‘flexi-cap’, which will allow fund managers to dabble in large-cap, mid-cap, and small-cap stocks without any investment threshold.

Alternatively, the industry has asked Sebi to set a threshold, based on the composition of the market, where large-caps account for 74 per cent of India’s total market capitalisation.