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Sunday, Jun 02, 2002

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Ads should tell the real story

THE changes effected by Securities Exchange Commission of the US to rules governing advertisements by mutual funds are interesting and revealing. Interesting aspects of the amendment relate to:

  • Disclosures relating to charges and expenses;

  • Disclosure of dates during which quoted performance occurred;

  • Contact numbers or websites where performance information can be obtained, and

  • Emphasis that fund advertisements are subject to anti-fraud provisions of the securities laws

    The changes to the disclosure norms are not significant. But the aim is to strictly check misleading performance advertisements (world over, asset management companies appear to be behaving in a similar manner by highlighting superior near-term performance) and offer investors access to quality information. The SEC also published an investor education report in January 2000 that exhorted investors to look beyond past performance.

    Indian disclosure rules need to be more elaborate than the US norms, where household investment in equities is less than 5 per cent that in India.

    Mutual fund advertisements in India often tend to highlight dividends declared when they may have no relation to the performance of the fund during the period. In addition, half-yearly performance advertisements do not contain a commentary that would place the performance in perspective. More informative and less misleading advertisements would be in the interest of both the funds and the investors.

    In addition, changes to the rules, such as those mandated by the SEC, will be useful. This includes disclosure of telephone numbers and Web sites, where standard updated product information will be available. In income funds, disclosure of costs is now of paramount importance, though there is reason to suspect that investors are not taking this into account.

    Of course, if defaulting on disclosures were subject to penal provisions, it would comfort investors more. Will SEBI move swiftly on these issues?

    Suresh Krishnamurthy

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