AMFI’s All New Mandate: Displaying 10-Year CAGR Returns in Mutual Fund Advertisements

In response to a recent observation by the Securities and Exchange Board of India (SEBI), the Association of Mutual Funds in India (AMFI) has issued a significant directive. This directive addresses the concerns raised by SEBI, which noted that asset management companies (AMCs) were disseminating misleading financial information, including future return projections, in their advertisements. As a result, AMFI has taken proactive steps to ensure transparency and accuracy in the mutual fund industry.

KeyHighlights of Latest AMFI Guidelines

  • SEBI notes misleading information in AMC advertisements.
  • AMCs directed to use 10-year CAGR returns in ads.
  • Maximum past returns set for equity and fixed-income funds.
  • Clear limits for different styles of hybrid and multi-asset funds.
  • AMFI emphasizes transparency and accuracy in mutual fund ads.

SEBI’s Concerns Spark AMFI’s Response

SEBI identified instances where AMC advertisements deviated from the regulations specified in the SEBI (Mutual Funds) Regulations, 1996. Some of these advertisements conveyed information that could lead investors to believe they would receive fixed returns, including systematic investment plans (Sips) presented as a multiple of systematic withdrawal plans (SWP). Additionally, certain illustrations depicted future returns based on assumptions and projections.

AMFI’s Guidelines for Clarity and Transparency

In light of these concerns, AMFI has issued fresh guidelines to uphold best practices in the industry. AMCs are now directed to showcase only 10-year Compounded Annual Rolling Returns (CAGR) in their advertisements. This directive ensures that investors receive accurate and transparent information about investment returns.

Prescribed Returns and Numerical Illustrations

AMFI’s guidelines allow for numerical illustrations in the case of SIP, SWP, or STP calculators. These illustrations are intended to explain the power of compounding and can be used for fund categories, including equity, fixed income, hybrid funds, and multi-asset funds.

Equity Schemes: Maximum Past Returns

For equity schemes, fund houses can display maximum past returns of 12.64 percent for the Sensex and 12.93 percent for the Nifty. These figures are based on the mean of 10 years of rolling returns between June 1, 2013, and May 30, 2023.

Fixed-Income Funds: Limits on Past Returns

Fixed-income funds are subject to a maximum past return of 7.20 percent, based on a 10-year GSec. These limitations aim to prevent exaggerated claims in advertisements.

Maximum Returns for Various Styles of Hybrid Funds

AMFI has introduced maximum past returns for different styles of hybrid mutual funds. Equity-heavy hybrid funds (75 percent equity and 25 percent debt) can show maximum returns of 11.50 percent. Equally balanced hybrid funds can display returns up to 10.07 percent. For debt-inclined hybrid funds (25 percent equity and 75 percent debt), the maximum prescribed returns are 8.56 percent.

Multi-Asset Funds: Setting the Cap on Returns

Multi-asset funds, comprising 40 percent equity, 40 percent debt, and 20 percent gold, can present returns with a cap set at 9.92 percent. This guideline ensures uniformity and consistency in advertising.

Tools for Clarity and Understanding

AMCs can utilize tools such as goal planning, SIP/STP/SWP calculators, allowing investors to select returns ranging from two percent to 13 percent. However, these tools should not be used to depict specific returns of a particular mutual fund scheme, maintaining transparency and accuracy.

Annual Review of Prescribed Returns

To adapt to market changes, AMFI will annually review the prescribed returns, considering benchmark movements and industry developments. This commitment ensures that the guidelines remain relevant and beneficial to investors.

Impact on Stock Market Investors

For investors in the stock market, this new rule signifies a significant step towards ensuring clarity and reliability in mutual fund advertisements. By focusing on 10-year CAGR returns, it becomes easier for investors to assess the historical performance of mutual funds accurately. This enhanced transparency can empower investors to make more informed decisions, reducing the risk of being misled by exaggerated or ambiguous claims. Overall, this rule benefits stock market investors by providing a clearer picture of a mutual fund’s historical performance, helping them make more informed investment choices.



Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.