The Hindu Business Line : MF investors turn more hungry for critical disclosures

ARE mutual funds disclosing enough in their fact-sheets? We know this question will not be answered easily, but let it be said in no uncertain terms that never before were investors in MFs more hungry for disclosures than now.

In fact, the market's rising interest in funds and its growing need to analyse portfolios has brought the whole issue of disclosures - and not merely dissemination of information - to the fore.

A note from HSBC MF to distributors broaches the subject decisively, drawing their attention to its latest fact-sheet, which has presented certain additional, critical disclosures. The idea, indicates Mr Sanjay Prakash, CEO, is to help the intermediaries (and, in turn, their clients) understand portfolios better and appreciate the accompanying risks.

Trees vs Forests analogy: Sample the risk profile of individual securities in the portfolio, which is provided along with its overall risk. This, the MF feels, will pave the way for superior dissection, especially so as the market needs to focus a bit more on the `trees' (that is, individual investments) and not merely on the `forest' (that is, the portfolio as a whole).

The trees-vs-forest analogy is quite interesting. The reference is particularly to the following issues: maturity months in case of fixed rate instruments, interest reset months in case of floaters, and average maturity in case of non-standard assets which have multiple principal repayments.

Besides, there are such conventional but critical aspects as the mark to market component of the fund and the yield to maturity of the portfolio.

The MF suggests that the daily valuations of fixed income securities are carried out by Crisil, the rating agency, independent of its own investment team. Crisil, incidentally, does not guarantee the accuracy of the valuation performed by the fund house; nor does it have any financial liability to the MF and its unitholders.

But do such disclosures really embody best practices and enhance transparency? Yes, avers Mr Prakash, adding that the additional information should help spawn better investment decisions. And he also accepts the general view that investors in India can do with a lot more information, provided they use such information wisely.

`Inform all kinds of risks': A line or two from Investment Company Institute, the mother of all funds' organisations, may not be out of place here. ICI urges us to appreciate risk in all its varieties, if we want to be informed investors. "As you know, markets can go up and down and you can lose money in any investment. This general investment risk is what most people think about when considering risk", ICI points out, adding that "unless you are familiar with the risks involved in an investment, you won't know what to expect from your fund's performance, and you won't know how to properly evaluate it. In general, there is a trade-off between the level of risk you decide to assume and your opportunity for reward".

At the end, let us sign off with an interesting quote from HSBC MF's December fact-sheet: "Risk is an inherent part of investing but more often than not, investors tend to look at returns in isolation... Investors today want more detailed information and interaction with their investment managers. They are looking for transparency and better information on specific risks".

Well said. One could not have agreed more.

Feedback may be sent to nilanjan@thehindu.co.in

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