Mutual fund awards -- Far too many for comfort

S.Vaidya Nathan

IF YOU had even casually looked at newspapers and magazines of last year, you could not have missed the plethora of mutual fund awards instituted by various entities and the liberal information they contained for promotion of the various schemes.

Of course, in any field, performance-based rankings are inevitable. So there is, per se nothing wrong in the various awards for mutual fund performances. A couple of years back, there was one and today, there are at least six, even if one ignores the rankings published by newspapers and various magazines.

To the extent there is a formal recognition of mutual fund performance the awards are welcome, as they acknowledge good fund management in a particular period. But the problem arises when mutual funds use them to run aggressive promotional campaigns aimed at garnering more funds and for image-building.

*With so many awards and divergent methods of evaluation, a sizeable number of schemes may figure among top performers under various criteria/categories.

* The universe of MFs to determine these awards is not comprehensive in many cases. As a consequence, the award may also not give the correct picture.

*If the awards are confined to a small number of schemes, there is a risk that even highly-ranked schemes could be pushed lower in a more comprehensive ranking.

*Most awards are designed for a one-, three- and five-year performances. To the extent they provide a snapshot over different time horizons, they are certainly useful. The three- and five-year performance may certainly point to a consistent performance. But to rely on awards alone would not be reliable as the fund may have slipped in the last quarter or two.

*A case in point would be the Birla Advantage Fund which figured at the top for three- and five-year rankings, but over a shorter time frame, its performance took a beating. This is why it is important for investors to look at a fund's performance over different time horizons and also the current portfolio, to evaluate investment decisions. This is also the one reason why high-decibel promotional campaigns using awards need to be given the short-shrift.

Since the use of awards in promotional campaigns has the potential to undermine the interest of investors, SEBI needs to take a close look at the manner of their usage by the funds.

It is true in the US, the star rankings dished out by Morningstar (the more widely used of the lot) are routinely used in promotional campaigns in a subtle way. But it is significant that studies have shown that investments based on such ratings would, more often than not, have delivered the goods. These are even reckoned to have the potential to confuse and misinform.

In the Indian context, SEBI could do well to allow only the rankings based on one or two comprehensive awards to be used in advertisements -- that too, only subtly where rankings are indicated by way of a note.

In identifying such awards for use in promotional campaigns, performance evaluation based on risk-adjusted returns needs to be given primacy. This assumes importance given the variety of schemes with different risk profiles and management styles.

Perhaps Crisil's rankings alone could be used in promotional campaigns. As for the rest, the funds could be allowed to publish them in their communication to investors, disclosing also the methodology as well as the top 10 or 20 schemes.

In all such communication and promotional campaigns, a fund could be required to give a complete list of where its schemes are ranked. This would help investors get a complete picture of a fund's position in the overall context and over different time periods.

While instituting measures in this context, SEBI should also ensure that funds do not go on a publicity spree citing investor surveys in support. This is more harmful to market and investor interests. The manner in which the Unit Trust of India (UTI) used the SEBI-NCAER findings on safety of investments is a case in point.

If the US-64 was rated as the third safest option by those surveyed, it should have alerted SEBI and prevented its use in the UTI's promotional campaigns. Clearly based on returns and, in particular, risk and the lack of transparency in pricing, the US-64 is one of the unstable investment options available.

One has to presume this much is known to the top management in SEBI as well. So it is surprising why the regulator chose to maintain a sepulchral silence even as the UTI went to town with the survey findings. The fact that the US-64 is outside the SEBI regulatory ambit may have led to inaction.

But had SEBI used this as an opportunity to highlight the fact that risks are not properly evaluated and considered by investors, and nudged the UTI into adopting a responsible stance with government suasion, if needed, it would have done a world of good to investors, the UTI and the market.

It is still not late for SEBI to act on the use of survey findings and myriad rankings by mutual funds to grab investor' mindshare. The sooner it gets cracking, the better.