A ‘global’ fund isn’t quite the same as an ‘international’ fund. A multi-cap fund isn’t the same as a diversified fund. And a monthly income plan doesn’t actually promise to deliver monthly income. Confused? The fund industry, in its keenness to draw in investors through a vast array of products, over the years, has tied itself up in knots over fund names.

Hazy definitions

First, there are vaguely defined equity products such as ‘opportunities’ funds and ‘multi-cap’ funds. The first were supposed to take concentrated bets on a few sectors at a time. But in practice not all ‘opportunities’ funds take concentrated bets.

A ‘multi-cap’ invests flexibly across large, mid or small-cap stocks. But it need not necessarily invest in all three. Anyway, how multi-cap funds are different from diversified funds is unclear.

Then, some fund houses have taken flights of fancy with acronyms. Thus you have a S.M.I.L.E fund (Small and Medium Indian Leading Equities), TIGER fund (The Infrastructure Growth and Economic Reforms) and even a CUB fund (Competitive Upcoming Businesses). When funds adopt fancy labels, investors may not have a clear picture about where the fund will invest or what kind of risks it will take on.

Usually, mandates are explained elaborately at the time of launch. But what about investors evaluating these funds much later? They may have to refer to fact sheets, product brochures or the mandatory scheme information document. But these documents often define fund objectives in the most non-committal manner.

Room to stray

The scheme information document is supposed to legally define a fund’s fundamental attributes and lay down its objectives, risks and boundaries.

But the most common line, cut-pasted into many an offer document, is: “The fund will invest up to 95 per cent of its portfolio in equity or equity related instruments”.

Often, objectives or fundamental attributes, even of specialised schemes, are defined so loosely that it has a lot of leeway to stray from the mandate its name suggests. Here is an ‘objective’ statement from a fund labelled as a small and mid-cap fund: “To primarily achieve capital appreciation by investing in diversified stocks that are generally termed as small and mid-caps and by investing in other equities.”

This fund can invest up to 35 per cent in ‘other equities or derivatives’, up to 15 per cent in money market instruments and upto 35 per cent in overseas securities.

Difficult debt

If equity funds are merely fanciful with labelling, the debt category, to lay investors, can be utterly bewildering.

Confronted with an array of ultra short term, short term, medium term, liquid, income, gilt and dynamic funds, offered with umpteen options, investors may hardly know where they must invest to earn a simple debt return.

It almost seems as if the debt investor must know the debt market down to its last instrument before he invests in a fund.

It is in this context that the Securities and Exchange Board of India (SEBI), seems to be taking up the issue of product labelling by mutual funds. Going by the above instances, the key issues to review seem to be:

Do funds define where they will invest, in precise terms?

Do funds actually stick to the investment strategies and risk profile indicated by their name?

Must there be a standard naming convention within equity, debt and hybrid funds to make it easier for investors to choose?

>Aarati.k@thehindu.co.in

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