Sebi may tweak colour code for mutual funds

Move follows representation from industry and distributors that have termed the existing scheme of 3 colour representation as inadequate

The Securities and Exchange Board of India (Sebi) plans to revamp the product labelling framework for mutual fund (MF) schemes.

The changes could include further categorisation of equity schemes. Under current guidelines, all MF equity schemes are colour-coded as brown, denoting high riskiness.

“Following feedback, the regulator plans to put in place a more comprehensive system on product labelling, which will differentiate between schemes in the same category, to create better awareness among investors,” said a person with knowledge of the development.

Introduced in July last year as an investor safety measure, Sebi had directed MF houses to colour-code their schemes, depending on their level of riskiness. Accordingly, MF products are assigned either blue, yellow or brown colours.

Blue, meant for low risk products, is assigned to income funds and fixed maturity plans. Yellow, representing medium risk, is for hybrid funds. Brown is used for all equity schemes, which typically don’t guarantee capital protection.

The MF segment and the distributor community had suggested this system did not represent the true picture of risk, particularly for equity funds. “A large-cap, a multi-cap and a sectoral equity fund are all colour-coded brown but the risks for each of these categories under the same equity asset class is different. A sector fund is comparatively a more risky product than the other two,” said Jimmy Patel, chief executive (CEO) at Quantum MF.

The issue was deliberated on by the Association of Mutual Funds in India. It had felt there was a need for additional colours to denote the different levels of risk for the equity category. “This is a welcome step, as equity funds are being too broadly represented by the brown colour code. The equity fund class in itself needs to be represented by more colours. The challenge Sebi will have to tackle is that there should not be too many colours, confusing the investors,” said Vikaas Sachdeva, CEO, Edelweiss MF.

Sector officials say the right product labelling will help curb mis-selling, by aligning the risk profiles of investors with the right product offering.