The Association of Mutual Funds in India (AMFI), has clarified that asset management companies (AMCs) cannot show future returns even as illustrations and has also directed them to use only the 10-year compounded annual rolling returns (CAGR) for showcasing investment returns in their advertisements.
The industry body has issued fresh guidelines on best practices to be followed after SEBI observed that some AMCs were releasing advertisements which were not in compliance with the letter and spirit of the provisions in the Advertisement Code prescribed in the SEBI (Mutual Funds) Regulations, 1996.
The Securities and Exchange Board of India (SEBI) had noted that some illustrations provided in the advertisements, presentations, brochures and pamphlets were such that they could lead investors to believe that they would be receiving fixed returns for their investments including that of systematic investment plans (SIPs) by demonstrating SWP (Systematic Withdrawal Plan) as a multiple of SIP.
Some illustrations were also seen depicting future returns based on assumptions and projections.
The capital markets regulator had, therefore, advised AMFI to convey to all the AMCs to refrain from such disclosures or advertisements which are ambiguous and likely to be misunderstood by the investors.
Prescribed returns
As per AMFI guidelines, numerical illustrations can be used in the case of SIP, SWP or STP calculators to explain the power of compounding. The illustrations can be provided only for the fund categories such as equity, fixed income, hybrid funds and multi-asset funds.
Notably, the numerical illustrations can only show CAGR returns prescribed by AMFI.
For equity schemes, fund houses can show maximum past returns of 12.64 percent for the Sensex and 12.93 percent for the Nifty. As per AMFI, the basis of computing this rate is the mean of 10 years of rolling returns between June 1, 2013, to May 30, 2023.
Similarly, the maximum past returns for fixed-income funds can be shown as 7.20 percent, which is based on a 10-year GSec.
AMFI has also come up with maximum past returns that can be shown for different styles of hybrid funds.
For equity-heavy hybrid funds (75 percent equity and 25 percent debt), the maximum returns shown can be 11.50 percent, and for an equally balanced hybrid fund, the maximum returns can be 10.07 percent. For debt-inclined hybrid funds (25 percent equity and 75 percent debt), the maximum prescribed returns are 8.56 percent.
For multi-asset funds (equity 40 percent, debt 40 percent and gold 20 percent), the cap for returns that can be shown is set at 9.92 percent.
As per the AMFI, none of the illustrations used by fund houses can indicate returns higher than those prescribed.
Further, AMFI has clarified that AMCs may use tools such as goal planning, and SIP/STP/SWP calculators, which permit investors to select returns from a range of returns starting from two percent to 13 percent for understanding the compounding effect, so long as such tools are not used to depict returns of any particular mutual fund scheme.
The returns prescribed by AMFI for the purpose of numerical illustrations in non-scheme-related materials would be reviewed annually, based on the movements of the benchmarks.