Whether labeling makes it easier to invest in mutual funds?

Continuing with various regulatory changes in mutual fund space, SEBI earlier during this week mandated mutual funds to label their offerings.  The purpose of labeling is to address the issue of mis-selling by enabling investors an easy understanding of the kind of mutual fund scheme they are investing in and its suitability to them.

Changes suggested

With effect from 1^st July 2013, all mutual fund companies shall label their schemes on the following parameters:

1.  Nature of scheme: whether the scheme is to create wealth or to provide regular income and its time horizon - whether short, medium or long term.

2.  Investment objective: All schemes shall describe its objective in a single sentence along with whether it is an equity, debt or hybrid product.

3.  Riskiness of investments: which shall categorized the risk attached to return of principal amount.  To achieve this, SEBI has suggested colour codes as below:

·       Blue             – Principal at low risk

·       Yellow         – Principal at medium risk

·       Brown          – Principal at high risk

4.  Further all schemes shall have a disclaimer that if the investors are not clear about the suitability of the products, they should consult their financial advisers.

All key documents (such is Key Information Memorandum, Scheme Information Documents, etc) as well as scheme advertisements should prominently disclosed the above labels.

For example, Fixed Maturity Plan shall come with the below mentioned labeling.

Whether it actually simplifies the investment process for investors?

Though the intention of SEBI is good, one needs to see whether this simplifies the investment process for the investors.  It is difficult to categorize the investments based on risk.  One single rule cannot be applied everywhere. 

Are all debt schemes low risk investments?  For eg:  FMPs, in general, may have low risk of principal amount getting reduced but it depends on the kind of company the mutual fund scheme has invested in.  If the investment is in low quality / rated company, the actual risk coding should not be blue but yellow or may be brown in case of investment in junk papers. 

Nevertheless, this is a good attempt by SEBI to simplify mutual fund investing for investors.  These labels can be used as an initial screener to short list the schemes one wants to invest in, followed by more scheme specific evaluation.

What do you feel about the labeling of mutual funds?  Will this simplify your mutual fund selection process?  Do share your comments with us.