Many regulatory changes have been made by SEBI (Securities and Exchange Board fo India) with respect to growth of mutual fund industry and investor’s benefits. Mutual fund colour coding is one such example of regulatory changes. Though, this mechanism has not produced desired result, it is aimed to provide investors an easy understanding of the mutual fund scheme in which they are investing. It came into effect on July 1, 2013.
Investors often find the mutual funds as cumbersome and get confused with the paperwork. Thus, color coding comes to rescue them during this stage by simplifying the things using different colours, as few factors of mutual funds can be understood with colours.
What Do The Colours Indicate?
As per SEBI regulatuons, the colours indicate-
- Blue- It indicates principal at low risk. This is ideal for someone looking for fixed and safe source of income. The instruments include fixed maturity plans, gilt funds and income funds.
- Yellow- It indicates principal at medium risk. It is beneficial for the ones who are looking for diversification between debt and equity. Balanced funds and monthly income plans will fall under this category.
- Brown- Brown colour denotes principal at high risk and that the investor is putting his money in high risk product. It is aimed at those investors who want benefit from potentially higher returns and have the risk appetite. Equity funds such as diversified funds, index funds and sectoral funds will be given brown colour.
According to the SEBI regulation , fund houses are required to label funds on the basis of 3 parameters: nature of scheme, investment objective and level of risk. Vijay Venkatram, managing director, Wealth Forum, says “A colour code will give an investor a preliminary idea of the kind of product he is looking to invest in” .
This mechanism of colour coding tends to simplify things for investors and helps the investors to find the most suitable mutual fund schemes as well as understand the risk associated with them.
What Needs To Be Done?
In a nutshell, this colour coding seeks to address the issue of mis-selling and helps the investors to be aware of the risks involved. Yet, there is a need to make the investors as well as mutual fund houses equipped with the knowledge of this colour coding. This is because of the reason that though, fund houses have colour coding on their application forms and various schemes, still they are unaware of what it represents. Also, just three colours of the mechanism don’t seem enough to cover all mutual funds categories. Like arbitrage funds, floating funds and short-term debt funds fall under blue category, but long-term debt funds cannot be included in low-risk investment because they have interest rate risk and default risk associated with them. Introducing more colours will help represent different risk levels of equity fund.
Also Read: A Guide To Tax Saving Mutual Funds