Mar 26, 2013, 10.55 AM IST | Source: CNBC-TV18

MF colour codes: What it means for your investments?

In an interview to CNBC-TV18, personal finance expert, Gaurav Mashruwala, Certified Financial Planner shared his outlook mutual funds' colour coding.

In an interview to CNBC-TV18, personal finance expert, Gaurav Mashruwala, Certified Financial Planner shared his outlook mutual funds' colour coding.

MF colour codes: Good move but will it prevent mis-selling?

Below is the verbatim transcript of Mashruwala's interview with CNBC-TV18.

Q: Securities and Exchange Board of India (SEBI) has issued a framework on product labeling with colour coding for mutual funds and that will be implemented from July 1, for all existing and forthcoming schemes. Could you explain how investors should read these colour codes? Are they meant only for risk?

A: Sebi has done a good job. In the past there has been issues whereby the scheme names of mutual funds were so long that investor did not know where he was investing or what was the underlying asset and how it will behave. To that extent, there are about four points that Sebi is talking about. One is the nature of the scheme. Therefore, mutual fund companies will help to disclose whether it is an income scheme or fixed income schemes or is it a growth oriented scheme from short-term, medium-term, long-term perspective. Second, they will also have to talk about one line description as to what the scheme is, is it going to be largecap, midcap, etc and the underlying asset class. So, is the scheme going to invest into debt, equity, gold etc.

When it comes to colour coding, there are three of them. There is blue colour coding, which means it’s a low risk and the principal will be more or less protected. The slightly higher one is a yellow one where we are seeing it’s a medium risk and principal will be little more volatile. The highest is brown, which says that the safety of principal is little less. So, blue is the safest followed by yellow and highest being brown. Apart from that, there will be one more line, which says that in case one is not clear with this, one can consult investment advisor. So, one single snapshot, which a mutual fund company will have to give in all its schemes starting July so investor can look at it and make out where the scheme is going to invest, what is the risk and the strategy of the scheme.

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