SEBI wants to color code mutual fund products

A few days ago I came across an article about SEBI recommending color coding mutual funds so investors can associate risk with different shades of color and be warned that red denotes equity which means loss of principal possible and green means conservative debt so capital is relatively safe (just an example).

I’m not too enthusiastic about this idea because it seems to oversimplify things and if they do decide red as a color for equity mutual funds that will deter at least new comers who don’t really understand the market well from investigating equity further, and it can also imply to people that a fund with a green shade is safe to go into and will never incur losses which won’t always be true.

I am sure there are arguments to be made that this is useful and the best way to find out the reaction is to do a pilot and measure results. That will really tell us what effect color coding has on mutual funds, and then implement it full scale.

Explain the rationale behind fund name

I think there is another thing that’s more important and can add more value as far as making investors smarter is concerned, and it will be good if SEBI looks at that sometime as well.

This is having a small section somewhere in the mutual fund that describes why the mutual fund has been named in a certain way, and in some cases not allowing mutual funds to have names that have a certain connotation but the underlying investment don’t fit the connotation.

For example, I was going through the page for HDFC’s Children’s Gift Fund and to me this looks like a simple equity mutual fund, how is this a gift for your children?

If there were a section that explained the rationale behind this name in 140 characters or less that would be great, and I think a very useful service for investors.

IRDA can look at such guidelines as well – what does that Tata AIA Mahalife Gold have to do with gold? I can’t see anything that ties it back to gold as an investment.

These are a couple of examples that are perhaps a bit extreme but even with funds like SBI Dynamic Bond Fund it will be useful to know in a few characters what ‘Dynamic’ implies? In this case I believe it means that the fund is not tied to investing in bonds with a maturity of a certain kind, and if that’s the case then that is useful information for the investors.

Some food for thought, what do you think?

10 thoughts on “SEBI wants to color code mutual fund products”

  1. I believe color code is a good step forward and not considering investors not-smart. Taking Manshu’s point forward, I think a financial product should also list its competitor products and give some per-defined parameters that say how it is different. Those parameters and competitors should be fixed by SEBI and there should be very few parameters for quick decision.

    1. In a company IPO prospectus, they have to list down their key competitors, the share price, P/E ratio and Book Value so this is something similar.

  2. I totally agree with you Manshu about color coding. It is really a bad idea and people will unecessary get scared or demotivated to invest in certain Mutual fund.
    The basic idea of looking at the long term or the SIP long term benefit will get ruined totally, this is only going to drive Debt fund.

    This is really not good news to encourage people, especially new commers to equity sector !


  3. We celebrate jubilee as Golden, Platinum, Silver! Then why not a GOLDEN ULIP 🙂
    Also credit cards too have this. Last time when I got the ICICI insurance papers, it was mentioned – Platinum Elite customer. Later when I realized everyone was getting the same the ego boost took a hit. 😛

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