SEBI’s move towards Mutual fund (MF) colour code system – What does this mean for investors?
Last week, Securities and Exchange Board of India (SEBI) has added another parameter in the mutual fund investments. With effective from 1-Jul-2013, all mutual fund schemes need to have a colour coding. Blue, Yellow and Brown are the colour codes to be used. What are these Mutual fund colour codes and what does this mean for investors?
What are these Mutual Funds colour codes?
With effective from 1-Jul-2013, all mutual fund schemes need to have a colour code.
- Mutual fund colour code – Blue – This refers that the investor is putting the money in low risk product.
- Mutual fund colour code – Yellow – This refers that the investor is putting the money in Moderate risk products.
- Mutual fund colour code – Brown – This refers that the investor is putting the money in High risk products.
Which schemes fall under this MF colour coding?
All new and existing mutual fund companies have to label their mutual fund schemes with these colour codes w.e.f. 1-Jul-2013.
How does this mutual fund colour code work?
Generally, all mutual fund scheme application forms, advertisements, brochures carry product labels. This label indicates the nature of mutual fund scheme, investment objectives, the category of instrument it would invest and the related risks it would carry. Now with this new guideline, it would be followed with the colour box about the level of the risk.
- All debt schemes would show a colour coding of BLUE indicating low risk. Debt schemes include debt mutual funds, liquid funds, and Gilt funds etc., which generally carry low risk.
- Hybrid products such as balanced mutual funds, monthly income plans (MIP) etc. would have a YELLOW colour code which indicates moderate risk.
- All direct equity investment schemes such as index funds, large cap funds, diversified funds, mid-cap and small cap funds and sector based funds would carry high risk and would be labeled with BROWN colour code.
Benefits of such Mutual funds colour code system
1) Brokers cannot miss-guide investors: Brokers cannot hide any of the risks involved in the mutual funds. E.g. if a retired person want to invest, currently, he has to do his own research or depend on broker to know the features. There are good chances that investor would be miss guided by his broker. If he knows that broker is selling mutual funds having BROWN colour code, he would be cautious before buying such funds.
2) Good indication to start: Thought Mutual fund colour code may not tell you exactly the detailed risks involved, it can be considered as a starting point and further research of the scheme can be done.
3) Know the risk upfront: Mutual fund colour code indicates the risk upfront without looking at the scheme objectives.
Drawbacks of Mutual fund colour code system
1) Just 3 colours may not indicate the total risks involved: These 3 mutual fund colour codes are not sufficient to indicate the risk. E.g. Index fund or sector based funds are categorized under BROWN which indicates high risks. However index funds carry low risk compared to sector based mutual funds which concentrate only in one sector.
2) Risks categorization would be inconsistent: The colour code does not take into consideration the weight age of risks. Ex. Monthly income plans and balanced funds are categorized under YELLOW code i.e. moderate risk. MIP invests up to 10% in equity and balanced funds invest up to 70% in equity related instruments. How both can be categorized as moderate risk.
Conclusion: Though there are couple of drawbacks, it is a good move from SEBI to have Mutual funds colour code system. Such MF colour code can be taken as a starting point for choosing a mutual fund.
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Topic: SEBI’s move towards Mutual fund (MF) colour code system