Sebi to mutual funds: Don’t promise returns, comply with ad code regulations

The Securities and Exchange Board of India (Sebi) has asked mutual funds (MF) not to highlight or assure returns to investors. The capital markets regulator has directed the Association of Mutual Funds of India, the trade body of the mutual fund sector, to stick to the approved advertisement code as part of the Sebi MF regulations.  

In a letter sent out on March 3, Sebi noted that it has seen some advertisements where some MFs have assured investors in pamphlets and brochures with a fixed sum of money if opted for a systematic investment plan (SIP) and systematic withdrawal plan (SWP).   

“It has been noticed that some of the Asset Management Companies are indulging in practices relating to advertisements, which are not in letter and spirit compliance with the Advertisement Code prescribed in SEBI (Mutual Funds) Regulations, 1996,” Sebi said. 

Sebi also noted that illustrations provided in the advertisements/ presentations/ brochures/ pamphlets would lead investors to believe that they will receive fixed returns on their investments. 

“Disclaimers and assumptions are in fine print that is likely to be missed out by the investors,” Sebi said. 

“Such disclosures/advertisements are ambiguous and likely to be misunderstood by the investors and are not in compliance with letter and spirit of the provisions of Sixth Schedule of SEBI (Mutual Funds) Regulations, 1996," Sebi further noted in its statement. 

Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. Whereas, an SWP is a facility where investors can withdraw a certain sum of money every month after a particular time period. 

Mutual funds, in principle, cannot assure returns. The main reason behind this rule is since all mutual funds invest money in equity and debt markets, the net asset values (NAVs) are subject to market fluctuations. In such cases, promising returns don't make sense. 

Sebi, in its statement, noted that some MF brochures and illustrations are giving the impression that returns are assured if someone starts a SIP and then after three or so years, starts an SWP. 

But Sebi has highlighted that SWP can draw from your capital, if your MF scheme’s net asset value (NAV) doesn’t grow consistently. 

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B-30 incentive structure 

Sebi has also asked mutual funds to keep the B-30 incentive structure on hold till fund houses put a system in place that addresses the concerns of Sebi.  

“While Sebi continues to be committed to financial inclusion incentive structure, the manner of implementation of various Sebi/AMFI directives in this regard by mutual funds revealed following inconsistencies/deficiencies,” Sebi said. 

Sebi had permitted mutual funds an additional expense ratio of 30 basis points or 0.30 per cent on new inflows (amounts up to Rs 2 lakh) from retail investors for incentivising mutual funds to get money from non-metro cities or B-30 cities and to energise the distribution network. 

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