AMFI requests that mutual funds limit the length of their CAGR return in ads to ten years

 AMFI requests that mutual funds limit the length of their CAGR return in ads to ten years

The regulation follows a SEBI assessment that AMCs are marketing products with potentially misleading investor-deceiving financial information, including returns.

Every year, the results that AMFI specifies for numerical illustrations will be examined.

Asset management companies (AMCs) are only allowed to use the 10-year compounded annual rolling returns (CAGR) to showcase investment returns in their advertisements, as stated by the Association of Mutual Funds in India (AMFI). Future returns cannot even be shown as illustrations.

Following SEBI's observation that some AMCs were issuing advertising that did not adhere to the language or spirit of the Advertisement Code as stipulated in the SEBI (Mutual Funds) Regulations, 1996, the industry body released updated recommendations on best practices to be followed.

By showing SWP (Systematic Withdrawal Plan) as a multiple of SIP, some illustrations in advertisements, presentations, brochures, and pamphlets could mislead investors into thinking they would receive fixed returns on their investments, including those made through systematic investment plans (SIPs), according to the Securities and Exchange Board of India (SEBI).

There were also several drawings that showed projected and assumed future profits.

Therefore, the capital markets regulator has directed AMFI to tell all of the AMCs to avoid making any disclosures or marketing that are unclear and might lead to investor misunderstanding.

Mandatory returns

In the case of SIP, SWP, or STP calculators, numerical examples may be utilized in accordance with AMFI recommendations to demonstrate the compounding capacity. Only fund types including equities, fixed income, hybrid, and multi-asset funds are eligible for the examples.

Interestingly, the numerical examples are limited to displaying AMFI-mandated CAGR returns.

Fund houses are allowed to display maximum historical returns for equity plans, which are 12.64 percent for the Sensex and 12.93 percent for the Nifty. According to AMFI, this rate is calculated using the mean of rolling returns for ten years, from June 1, 2013, to May 30, 2023.

In a similar vein, based on a 10-year GSec, the maximum previous returns for fixed-income funds may be shown as 7.20 percent.

The maximum previous returns that may be shown for various hybrid fund designs has also been determined by AMFI.

The maximum returns shown for equity-heavy hybrid funds (75 percent stock and 25 percent debt) are 11.50 percent, while the highest returns for an evenly balanced hybrid fund are 10.07 percent. The maximum recommended returns for debt-inclined hybrid funds (25 percent equity and 75 percent debt) are 8.56 percent.

The maximum percentage of returns that may be shown for multi-asset funds (equity 40%, debt 40%, and gold 20%) is fixed at 9.92 percent.

None of the fund houses' drawings, according to the AMFI, can show returns greater than those that are advised.

AMFI has also made it clear that AMCs are allowed to use tools like goal planning and SIP/STP/SWP calculators, which let investors choose returns from two percent to thirteen percent to understand the compounding effect, as long as they aren't used to show the returns of any specific mutual fund scheme.

Based on the movements of the benchmarks, the returns that AMFI specifies for numerical illustrations in non-scheme-related documents would be evaluated once a year.