sebi
The Securities and Exchange Board of India (SEBI) has recently issued a circular aimed at enhancing transparency and investor understanding regarding equity-oriented mutual fund schemes. This initiative mandates the disclosure of the Information Ratio (IR), a metric designed to provide a clearer insight into risk-adjusted returns (RAR).
Background:
The existing SEBI (Mutual Funds) Regulations, 1996, and associated Master Circulars require AMCs to periodically disclose performance information about their mutual fund schemes. Furthermore, AMCs voluntarily provide additional disclosures regarding scheme returns.
Need for RAR Disclosure:
The need for a standardized measure of “Risk Adjusted Return” (RAR) has arisen, intending to reflect a comprehensive evaluation of mutual fund scheme performance.
Importance of Information Ratio (IR):
Given that performance volatility is crucial in assessing the suitability of mutual fund schemes, the Information Ratio (IR) serves as a recognized financial metric. It gauges a portfolio manager's skill by comparing excess returns against a benchmark, incorporating standard deviation to account for risk factors.
Consultation Process:
To enhance transparency in AMCs' disclosures and facilitate better decision-making for investors, the proposal for IR disclosure was discussed publicly and deliberated by the Mutual Funds Advisory Committee (MFAC).
Decisions Based on Recommendations:
Following the MFAC's suggestions and public feedback analysis, the following measures have been instituted:
5.1.1. AMCs are required to disclose the IR of their scheme portfolios daily on their website alongside performance metrics.
5.1.2. AMFI must ensure that these disclosures are accessible on its website in a standardized, downloadable, spreadsheet format.
5.1.3. The IR disclosure requirement applies exclusively to equity-oriented schemes.
5.1.4. To standardize calculations across equity-oriented mutual funds, the following formula for IR will be used:
IR = (Portfolio Rate of Returns - Benchmark Rate of Returns) / Standard Deviation of Excess Return
Where,
Excess Return = Portfolio Rate of Returns - Benchmark Rate of Returns
The benchmark will be the Tier 1 benchmark currently recognized by equity-oriented mutual funds. Volatility will be computed based on daily return data, with portfolio returns calculated using an arithmetic approach.
5.1.5. To improve investor understanding of the IR, AMCs and AMFI will undertake educational measures about RAR and IR. A dedicated budget will be allocated for investor education, leveraging social and mass media channels for greater outreach.