SEBI issued a circular dated March 18, 2016, substantially increasing the disclosure requirements for mutual funds. In regard to disclosures in the Consolidated Account Statement, the circular now requires the CAS to provide the total purchase value/ cost of investment in each scheme and the half-year CAS to disclose the amount of actual commission, monetary and otherwise, paid by AMCs/MFs to distributors during the half-year period against the concerned investor’s total investments in each MF scheme. Additional requirements have been imposed in relation to disclosures on the dashboard on their MF websites, within the scheme information document, key information memorandum, etc. This includes disclosures pertaining to the remuneration of MF chief executive officers, ratio of CEO’s remuneration to median employee remuneration, etc. Further, to ensure that MFs reduce reliance on credit rating agencies and lower the risk of defaults, the Circular mandates fund houses to have an appropriate system to conduct in-house credit risk assessment before investing in fixed income products.
While SEBI’s move is aimed at increasing transparency in the operation of mutual funds and helping align aspects such as executive remuneration with investors’ interests, it entails considerable risks. Although investors will have access to a greater degree of information, can investors make of all this new information? There may be a possibility of the information being misconstrued and investors being dissuaded from investing in mutual funds. For instance, while spelling out distributors’ commission in absolute terms may be directed at curbing mis-selling, it may lead to investors pulling out and going direct, if they are unhappy with high distributor commissions. Given that direct plans are meant for sophisticated investors who can choose and track MF schemes on their own, unqualified retail investors taking the direct investment route could be dangerous. Transparency cannot come at the cost of hampering the growth of the mutual fund sector.