A fund is known by the label it keeps
SEBI’s move to evolve an official fund labelling system will help investors make the right choices.
The week before last, the markets and mutual funds regulator Securities and Exchange Board of India (SEBI) had announced a large set of changes to the new rules that govern mutual funds, IPOs, financial advisers and a few more. The SEBI board has taken the decisions regarding these changes and they’ve been announced publicly but the formal notifications and the actual regulations are yet to be issued.
One of these is something that finds only the briefest six-word mention in the press release, has attracted no comment in the media and yet could end up having a huge impact on how investors evaluate and choose (or reject) mutual funds.
SEBI’s press release says that the regulator will “Evolve a system of ‘product labelling’”.
Product labelling basically means creating a categorisation system that helps investors make sense of the large number and variety of funds that are available. From cars to airline tickets, consumers need such categorisation while making purchase decisions in all kinds of products where the choice is large and the product complexity high.
However, in the case of most non-financial products, the biggest anchor for the categorisation is the product price.
It’s unlikely that a car buyer will accidentally buy a Mercedes instead of an Indigo, but in the absence of the pricing signal, equivalent mistakes are quite common among mutual fund investors.
However, while SEBI prepares an official labelling system, investors have a number of other ones available which may not have a statutory status but are just as useful to the investor. Most fund research outfits have evolved their own systems, with Value Research’s system being the oldest, having been launched in 1992 and evolved continuously since.
A labelling system where investors can start their investing process with choosing a category that best suits their goal would be invaluable, provided the labels can be mapped to real-world investing needs and the funds which carry the label really do fit the bill.