What is product labeling or colour coding in mutual funds?
As the name suggests, colour coding depicts the level of risk involved in mutual funds.SEBI has introduced it in the MF industry in an effort to check mis-selling.
On which parameters is colour coding based?
Colour coding is mainly based on two parameters - nature and investment objective of the mutual funds scheme. The nature of scheme defines the time frame of the fund i.e. short, medium or long term scheme while the investment objective indicates the kind of product i.e. equity or debt.
Which do the colour codes depict?
SEBI has mandated three colours - blue, yellow and brown. Blue colour indicates that the principal of investment is at low risk. Yellow suggests your investment is at medium risk while brown indicates that your principal investment is at high risk.
However,
colour coding is just an indication of risk level. SEBI is not giving any kind
of recommendations to the investors for investments – it is not suggesting that
blue colour investments are worthy of 
investments because it is low
risk.
When it will be implemented?
The proposed regulation will be applicable with effect from July 1, 2013. However, AMCs can adopt the regulation before the effective date. All the mutual funds houses have been instructed to label their new as well as existing products as per colour coding guidelines.
What is the purpose of colour coding?
Colour coding enables investors to better understand the risk associated with the product. The main purpose behind its introduction is to curb mis-selling in the mutual fund industry. Now, investors are expected to be better aware of the risk involved in their investments.
What will be the impact of it in MF industry?
Pankaj Mathpal from Optima Money said “it is a good decision of market regulator. However, the colour coding will not tell the exact risk of the scheme but it will give opportunity to investors as well as advisors to discuss about relation between risk and returns.”
Vinayak Sapre, VVS Venture said that investor’s education is far more important than imposing colour coding. “ Brown colour indicates that your investment is at high risk; but, high risk gives high returns. For instance, if you go to doctor for any disease say cold or throat infection, the doctor will prescribe you antibiotic despite knowing the fact that it has some side effects. But this risk must be taken to cure the ailment. Similarly, high risk is to be taken in investments too, even though it has some side effects because it gives you better returns,” added Sapre.
How will colour coding be placed in advertisements and information?
SEBI has mandated that the colour coding must be depicted on the front page of initial offering application forms, KIM, SID and common application form. In advertisements, AMC are required to place the colour coding in such a manner that it could be prominently visible to the viewers.
