Why Color Code in MF Scheme is not Enough?
From 1st July 2013, the color code in mutual funds schemes will get implemented. This is a new mandate by SEBI wherein every mutual funds scheme has to be label in a specific color (from three mandated) to show the level of risk and objectives of that scheme. Although this is done to ease the choice for investors, it is not the decision maker when you want to c any Mutual Funds scheme.
Let’s understand what these color code indicates and to what extent they will be helpful for the investors-
What Is the color code?
All mutual funds companies will have product label now where each scheme will be coded in some color to differentiate the level of risk, Investment Planning objective, the nature of scheme and kind of instruments it is. There are three colors –Blue, Yellow and Brown within which mutual schemes will be labeled. The label will include details of the schemes such as “to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term)”.Also mutual funds would have to state a brief about the investment objective in a single sentence followed by kind of product in which investor is investing (equity or debt). They also need to carry disclaimer that “investors should consult their financial advisers if they are not clear about the suitability of the product’. This product labeling will be carried in all common application forms, advertisement and product brochures companies come out with.
There are three colors which have been mandated for this purpose:
Brown– Any scheme with high risk will be labeled in brown color. So all equity oriented schemes will be carrying this color code. However, there is no demarcation between the category of equity schemes which means whether it is an index fund, large cap fund or a mid-cap fund, all will have have brown color code against them.
Yellow– This will indicate that scheme have a medium risk associated with it. All hybrid funds i.e. balanced fund and monthly income plans will be in this color code.
Blue: This will indicate the scheme carry lower risk. Debt Mutual Funds i.e. gilt funds, FMPs, Liquid funds or income fund will be categorized under this color code.
With this color code SEBI Registered Investment Advisor aims to ease the selection process for investors. Through color codes investors will be able to differentiate between the high and low risk schemes.
Does it Really benefit
A color code is only the first level of selection which does not require much of a research. The more rigorous process is when one has to create an optimum portfolio with mix of these schemes. The color codes has put all equity or debt scheme under one risk proposition which is not enough and some of it not even viable. For e.g. A sector funds carry much higher risk then a large cap diversified fund.
Similarly there is a great difference in the level of risk between a balanced fund and an MIP. In fact a balanced fund is an equity oriented scheme where equity exposure can be as high as 75% while an MIP is a debt oriented scheme which can have a small 5% exposure in equity. Thus both of these categories are suited for different investors. The Similar holds in debt funds scheme where a liquid fund is a very low risk scheme while a gilt fund has higher risk associated. The second difficulty for investors is the objective statement as no MF scheme provides any fixed regular income. All options are through dividends or SWP which can vary and so it will not hold true for all of them.
The color code is just a starting point for any investor to differentiate between schemes. The actual research starts within these when you need to find one which can match your requirement. So make sure you embark on a proper research and do not make a decision based on the color codes only.