Nifty, Sensex to be benchmarks for MF returns

Sebi tells AMCs to go beyond comparison with sectoral indices

To restrict mutual funds (MFs) from giving misleading data of their performance to investors, asset management companies (AMCs) have been asked to follow a standard set of norms.

Notably, MFs have been asked to benchmark the performance of their schemes with that of either the Sensex of the Bombay Stock Exchange (BSE) or the S&P CNX Nifty of the National Stock Exchange (NSE).

This is part of a circular the Securities and Exchange Board of India (Sebi) has issued to all 40 domestic AMCs, listing norms for “calculation of parameters for disclosure of MF scheme information”.

At present, most MFs measure the performance of their schemes with that of the respective sectoral indices. For instance, the information technology sector fund is measured against BSE’s IT index. This does not present the correct picture as the broader market could have seen significant moves.

The regulator was aiming at more quantitative disclosures, not just qualitative disclosures, as was the case at present, said a fund manager.

Annualised return
In case a scheme has a growth plan, Sebi has asked MFs to disclose returns on an annualised basis. There has been no uniformity in this. In case a scheme does not have a growth plan, Sebi said calculation of performance should be done using both capital gains (the change in the NAV, or net asset value, per unit of the scheme over the period) and the dividend per unit paid during the period.

Risk-adjusted return will have to be calculated as excess return obtained by the scheme over the risk-free rate for the period, per unit of the risk taken. The returns will be annualised. Further, the scheme should also disclose the highest and lowest expense ratios for the period.

At present, most funds only disclose the maximum expenses they charge. These generally comprise the outer limit and do not reflect the actual expenses. Similarly, in debt schemes, the fund must reveal short-term and long-term risk-free rates, to help an investor assess whether the fund manager has earned higher returns for them.

The beta for the scheme, a measure of relative volatility, will have to be calculated with respect to either the Nifty or the Sensex. It will be calculated for the period the returns are provided and not the period MFs choose. While calculating beta, weekly returns should be considered for both the scheme and the index (Nifty/Sensex), Sebi said.

The turnover of a portfolio should be calculated as the ratio of the lesser of sales or purchases of securities over the period concerned to the average net assets over that period.