Colour-codes for MFs leave investors, fund houses confused

Sebi had asked fund houses to categorise products according to risk profiles; to colour code each category

Mutual fund houses are now colour-coding products on the basis of their risk profile. However, confusion still persists among fund houses on the definitions of the colour schemes, particularly among debt products.

Capital market regulator, Sebi, had asked fund houses to categorise products according to risk profiles and colour code each category. The three colour schemes brown for high-risk products, yellow for medium-risk products and blue for low-risk products.

The criteria taken into consideration for the colour schemes is the risk on the principal invested.

Based on this definition, all equity products have been classified as high-risk products, all debt as low-risk products and all hybrid-products, those which have a mix of equity and debt as medium-risk products. Most fund houses have chosen to follow these definitions.

But fund analysts believe that such flat definitions could be unfair as the level of risk in each product varies. “For instance, a gilt product which invests in government securities could be considered safe, if held to maturity. But it could lead to huge capital loss if the interest regime changes,” said the chief executive officer of an Indian fund house.

Funds cannot be classified as pure equity, hybrid or debt, said analysts.

Fund houses are taking their own interpretation at this point. This could leave investors perplexed as to the actual risk-levels involved. A CEO of a mutual fund house pointed out how a liquid plus fund was classified as a medium-risk product by one and as a low-risk product by another.

“This is the kind of classification that could leave fund houses confused. But this also highlights the need for a financial advisor for retail investors,” said the CEO.