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In order to increase transparency in mutual funds, SEBI has introduced another metric to disclose performance of an actively managed equity scheme.
The market regulator has asked fund houses to disclose risk adjusted returns (RAR) along with compound annual growth rate (CAGR) returns.
Simply put, the market regulator said that all equity schemes will have to disclose the level of risk taken by them to deliver returns.
Sharing the rationale, SEBI said, “Considering the significance of volatility of performance in determining the suitability of MF schemes, Information Ratio (IR) is an established financial ratio to measure the RAR of any scheme portfolio. It is often used as a measure of a portfolio manager's level of skill and ability to generate excess returns, relative to a benchmark and also attempts to identify the consistency of the performance by incorporating standard deviation/risk factor into the calculation.”
To make things simple, SEBI said that fund houses should disclose information ratio (IR), which is the ratio of tracking difference (TD) and Tracking Error (TE).
IR = TD/TE
While TD is the difference between returns generated by the fund and its benchmark, TE is the standard deviation of the difference of daily scheme return and daily benchmark return over a period of time.
Higher IR represents better risk adjusted performance. Let us look at the table to understand this concept.
|
Schemes |
Scheme A |
Scheme B |
|
Tracking difference |
5% |
5% |
|
Tracking Error |
4% |
6% |
|
IR |
1.25% |
0.83% |
As you can see, while both Scheme A and B generated excess returns of 5% over their respective benchmarks, scheme A is better than scheme B in terms of RAR as scheme A took comparatively less risk to deliver equivalent return.
SEBI said that IR will be a relative measure that can be used to compare RAR across MF schemes under a particular category with a common reference benchmark.
The market regulator said that such a disclosure should be made available across promotion materials, product notes and AMCs/AMFI website.
Also, all active funds, be it equity oriented schemes, which include aggressive hybrid funds, balanced advantage funds and other hybrid funds having equity taxation will have to disclose IR on a daily basis.
SEBI has further asked AMCs and AMFI to educate investors about RAR, IR and their significance in scheme performance evaluation. A portion of the IAP budget should be set aside for this education.
This will come into effect from April 17, 2025.
