Advertising campaigns for financial products in India have usually relied on sentimental appeal rather than hard facts. Thus, you have insurance ads showing a distraught widow being turned away by a hard-boiled ‘public sector' official.
WATER-TIGHT
The only financial products which have remained immune to this pattern are mutual funds. And there are two key reasons why mutual funds, since the nineties, have stuck to shockingly uninteresting, but completely fact-based ads. One is the regulatory cap on fund expenses. The other is the strict advertising code that the Securities and Exchange Board of India has had in place for funds since it drafted its first set of mutual fund regulations in 1996. Securities and Exchange Board of India's original advertising code incorporated as many 19 rules dictating what a mutual fund may or may not display in its advertisements. This code expressly forbade:
Claims regarding past performance without stating that past performance may be unsustainable in future; promises or indications regarding likely returns; comparative advertising; any assurance or guarantee of returns; celebrity endorsements; naming of a scheme to subtly indicate any assurance of return. Apart from warning investors that ‘all mutual funds are subject to market risks', funds also had to state that “there can be no assurance that the fund's goals will be met”. If advertised through the electronic medium, it had to adhere to elaborate rules on the length of time, and font size used to display risk factors. There were also number of rules on how these returns must be calculated, compared and displayed.
RELAXED
Last week, the Securities and Exchange Board of India decided to replace this old advertising code with a brand new one, which essentially simplifies and relaxes many of these rules. Gone now are the elaborate rules governing the content and format of mutual fund ads. Instead, the new code merely specifies certain principles that mutual funds should not violate. Ads still need to be truthful, fair and complete and must not mislead investors. Grandiose slogans, celebrities and promises of bounty are still forbidden. But complicated and scary-sounding ‘risk factor' statements and disclaimers have been done away with. While rules on calculation of returns have been done away with, the performance or other data that a fund puts out must be standard across offer documents, a fund's website and other literature.
These changes to the mutual fund advertising code, though they represent a shift to a more liberal regime for funds, seem to be in keeping with the times. After all, when the original advertising rules for the industry were formulated in 1996, Indian investors had practically no exposure to ‘market-linked' products, being used only to safe investments like bank deposits or term insurance from LIC. The stock and bond markets in which funds invested, and the surveillance and regulatory mechanisms governing them, were in the nascent stages too. This made it incumbent upon Securities and Exchange Board of India to intervene aggressively to protect first-time investors from tall product claims.
Today, market-linked products are the norm, and considerable competition makes sure that only the best performers attract money. Retail investors, too, are armed with multiple sources of information and tools to evaluate the fund, thus rendering unnecessary such an elaborate set of rules on mutual fund advertising.
But Securities and Exchange Board of India's old advertising code has served a very useful purpose that other financial product regulators will do well to note. By allowing mutual funds to attract new money based on only hard facts, it seems to have contributed to making retail investors in mutual funds a savvy bunch.
Readers who write in to us today display the ability to distinguish between good and bad advice, allocate money between asset classes and switch quickly out of products that don't deliver performance. They have also learnt the most important lesson in investing — Guaranteed returns usually carry hidden costs. And a high return usually comes with equivalent risk.