When investors decide to invest their hard-earned money in mutual funds, they tend to get carried away with assurances of high returns, which — more often than not — do not see the light of the day.
In the view of this, capital markets regulator Sebi (Securities Exchange Board of India) wrote to the mutual fund industry body (Association of Mutual Funds in India) telling fund houses to refrain from highlighting assured returns in their adverts.
In the letter, SEBI observed that fund houses include certain illustrations in their advertisements, presentations and brochures that can “lead investors to believe that they will be receiving fixed returns for their investments”.
“Illustrations are shown depicting future returns on the basis of assumptions and projections. Disclaimer and assumptions are made in fine print that are likely to be missed out by the investors,” the letter reads.
“It has been noticed that some of the Asset Management Companies are indulging in practices relating to advertisements, which are not in letter and spirit compliance with the Advertisement Code prescribed in SEBI (Mutual Funds) Regulations, 1996,” the letter further reads.
The letter also highlights the use of systematic transfer plans (SWPs) in illustrations to indicate regular returns.
On this, investment advisors point out that the fund houses should not project high returns based on their past returns.
“Let us say some fund scheme gave superior returns in 2021, it doesn't mean that they would be able to repeat that rate of returns in the years to come,” said S Sridharan, founder and principal officer, Wealth Ladder Direct.
He further points out that investors must be careful about the promises made at the time of launch of mutual funds as well.
“Even if a fund house launches a new fund, it is not supposed to promise a fixed returns. After all, there is no illustration of past returns,” he said.
Before investing in mutual funds, investors should be aware of these points:
1. Investing in stocks: Mutual funds invest in the securities of listed firms. So, the collective returns given by the stocks of these companies are reflected in the returns of mutual fund houses.
2. No fixed returns: There is no concept of “assured returns” of mutual fund houses when the investment is made in the equity and equity-related instruments.
3. Risk and reward: The timeless principle of investing i.e., risk and reward go hand in hand. When you want to earn higher returns, you will have to take a higher risk. You can’t get one without the other.
4. Historical returns: The past returns given by mutual funds is an indication of how they have performed in the years gone by. This does not, necessarily, mean an assurance of future returns.
5. Investing in bonds: If the aim is to earn assured returns, investors should look at investing in risk-free investments such as debt funds, fixed deposits or bonds.