In order to increase transparency and enable investors to make better investment decisions, the market regulator Securities Exchange Board of India (SEBI) has ordered asset management companies to make some necessary disclosures.
The SEBI has mandated that Asset Management Companies (AMCs) need to disclose periodic information about the performance of mutual fund schemes and the ‘Risk-Adjusted Return’ (RAR) of the scheme. SEBI added that a scheme’s Information Ratio (IR) is an established financial ratio to measure the RAR of a scheme. The IR can be used to measure the ability of a portfolio manager to generate returns by comparison to a benchmark.
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“The extant provisions of the SEBI (Mutual Funds) Regulations, 1996 and Master Circular specified thereunder inter alia mandate filing of periodic information regarding schemes’ performance by AMCs. Apart from the same, appropriate disclosures pertaining to scheme returns are also made voluntarily, in various other documents/disclosures by AMCs. In addition to the above, a need has been felt to mandate disclosure of the “Risk-Adjusted Return” (RAR), which shall represent a more holistic measure of the scheme’s performance,” the SEBI said.
The SEBI said that all mutual funds and AMCs need to mandatorily disclose the IR of their scheme’s portfolio for equity-oriented schemes on their website along with performance disclosure, on a daily basis. Additionally, the AMFI has been asked to ensure that such disclosures are available on its website in a comparable, downloadable and machine-readable format.
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The SEBI also shared the methodology for calculating IR in its circular in order to ensure uniformity. Here's the formula shared by SEBI:
Portfolio Rate of Returns- Benchmark - Rate of Returns ÷ Standard Deviation of Excess Return
The SEBI mentioned that Excess Returns will be calculated by subtracting the benchmark rate or returns from the portfolio rate of returns. The SEBI added that the benchmark used for the calculation has to be the Tier 1 benchmark currently tracked by the equity-oriented Mutual Fund scheme.
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The SEBI also said that all AMCs and the AMFI will undertake initiatives to educate investors about RAR, IR and their importance in evaluating a scheme’s performance. Additionally, an allocation will also be made from the budget for investor education through mass media channels to maximise outreach and impact.
