SEBI tells mutual funds to not promise returns; comply with advertisement code

SEBI has asked mutual funds to refrain from making assurances of returns and has advised distributors too

The capital market regulator, Securities and Exchange Board of India (SEBI), told mutual funds (MF) not to assure returns to investors. In a letter dated March 3 that it sent out to the Association of Mutual Funds of India (AMFI; the MF industry’s trade body), it reminded AMFI to stick to the advertisement code as part of the SEBI MF regulations.

It said that it came across instances where some MFs have circulated pamphlets and brochures that lead investors to believe that they will receive a fixed sum of money if they do a combination of systematic investment plan (SIP) and systematic withdrawal plan (SWP).

Also read | NSE cautions investors against schemes offering guaranteed returns

An SWP is a facility where you get to withdraw a certain sum of money every month. Whereas a SIP is a facility wherein you get to invest a sum of money, regularly, typically every month. While mutual funds cannot, by law, assure returns, an SWP is a popular mechanism to get regular returns; a facility popular with retirees in recent years thanks to growing awareness.

Promising returns, or giving an impression that this is a sure-shot way to earn a regular income- is another matter. And that’s where the problem arises. SEBI appears to have come across brochures and illustrations that are being peddled to give an impression that returns are assured, if you, say start a SIP and then after three or so years, start an SWP. In reality, SWP can draw from your capital, if your scheme’s net asset value (NAV) doesn’t grow consistently.

As per SEBI MF regulations, no mutual fund can assure returns. Since all mutual funds invest money in equity and debt markets, the NAVs are subject to market ups and downs. In this case, promising returns doesn't make sense.

SEBI has also frowned upon showing illustrations about future returns based on assumptions put in the fine print. “In this regard, you are hereby advised to communicate to all the AMCs to refrain from such practices in the future and remove such advertisements/pamphlets/presentations and brochures from all the mediums and to advise their distributors not to use such advertisements/pamphlets/presentations and brochures,” said SEBI in its letter to AMFI.