Indian MF industry earns 'top grade' in data disclosures globally

The Indian mutual fund industry along with the US received 'top grade' rating in disclosures thanks to their robust disclosure practices in areas such as expense ratios, fund manager information and performance track record etc, according to a recent study. The country, however, needs to be more transparent in terms of performance commentary and material risks in the specific funds.

The study was part of Morningstar's biannual Global Investor Experience (GIE) report on Disclosure. In its sixth edition, the report graded the experiences of mutual fund investors in 26 countries across North America, Europe, Asia, and Africa.

"India and the US took the top spots this year, after also getting top grades in our fifth edition. These countries earned their top grades through robust disclosure across our six key disclosure dimensions. These markets feature global best practices for the disclosure of portfolio manager names, fund ownership, and compensation. India has set a high standard with monthly required portfolio holdings disclosure," says the report.

The six disclosure dimensions include simplified and non-simplified prospectus, fee disclosure, portfolio holdings disclosure, portfolio manager name and compensation disclosure, sales disclosure, ESG and stewardship disclosure.

Specifically, in case of India, the report notes that the country earned a 'top grade' given the strength of its requirements for monthly portfolio holdings disclosure, portfolio management disclosure, and specifications for the simplified prospectus.

However, it adds that India should work to improve the level of detail provided by fund firms in discussions of performance and risk within fund literature. "Performance commentary if available in fund documents in Key Information Memorandum (KIM) and factsheets is typically generic; more granular detailed performance commentary on specific funds would be useful for investors," says Kaustubh Belapurkar, Director - Manager Research, Morningstar India to Business Today.

"Fund documents like the KIM typically cover all possible risks on funds. Each type of fund will have certain types of risk that are more material than others. It would be useful for investors for the fund documents to highlight the specific material risks applicable to each fund," he elaborates.

Key highlights for India:

• India has one of the best portfolio disclosures globally, with monthly portfolio disclosures. This has been further strengthened with the fortnightly portfolio disclosures for fixed income funds from October 2020 onwards.
• Indian funds have the shortest lag in the release of portfolio holdings data making it easier for investors to have access to the latest portfolio information at the earliest.
• Other disclosures though a simplified prospectus like the Key Information Memorandum, or KIM and factsheets, make it easy for Indian investors to access information like expense ratios, fund manager name and experience, historical returns over different time periods and comparison with relevant benchmarks.
• Other information such as manager's investments in funds and fund manager compensation are useful disclosures. India is amongst the few countries that mandates these disclosures.
• Material risk for funds is another important disclosure, currently most funds declare all standard risks rather than only those material for a fund. The enhanced riskometer will help enhance the risk disclosures, but asset managers should look to highlight the material risks each fund is specifically exposed to in fund documents.
• Managers commentary on performance is a useful highlight for investors to understand the drivers of performance. India can improve on this front as most performance commentary is usually generic.
• While uptake of ESG is still in the nascent stage from an Indian context, regulations around ESG investing will help avoid greenwashing by funds. Worldwide, much environmental, social, and governance regulation is in the pipeline that should provide more - standardized disclosure to inform investors' understanding and comparison of products. This should help prevent greenwashing-or using ESG claims in fund marketing without ESG principles truly guiding investment decisions.

Since the inception of the GIE study, the US has consistently led the pack on disclosure, while India has incrementally added global best practices to its disclosure framework.

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