Sebi to soon come out with norms on colour coding of MF schemes

NEW DELHI: To help mutual fund investors take informed decisions, market regulator Sebi will soon come out with new guidelines for colour-coding of MF schemes with five colours representing appropriate risk level of the product.

Currently, mutual funds are required to have three colours for their schemes which will be increased to five, sources said.

As per decision taken in Sebi's mutual fund advisory committee meeting yesterday, these five colours will represent very low, low, medium, high and very high risks associated with various products.

"Sebi will come out with detailed guidelines re-aligning different mutual fund products with colour-coding system," a source said.

The Securities and Exchange Board of India (Sebi), which regulates over Rs 11-lakh crore worth mutual fund industry, will be coming out with the regulation on payment of upfront commission which will be principle-based, following a simple formula, which can be easily monitored and can be enforced, the source added.

Besides, greater disclosure norms will be prescribed on commission payments.

It was felt that there is a need to better regulate the commissions paid to mutual fund distributors and adopt 'a full trail model' in due course in the interest of investors, sources said.

The Committee, which includes representatives of various fund houses, industry body AMFI and banks along with independent experts, has decided that unclaimed redemption and dividend amount may be allowed to be invested in 'liquid' funds and guideline on this front will be issued shortly.

Total expense ratio or TER on close-ended mutual fund schemes may be reduced by 100 basis points for second and subsequent years.

Besides, certain amendment will be carried out to exclude Foreign Portfolio Investors or FPI Category I and Category II for managing/advising of offshore pooled assets by local mutual fund managers.

FPI regime brings together all foreign investor classes such as Foreign Institutional Investors (FIIs), their sub-accounts and Qualified Foreign Investors (QFIs).

Category--I FPIs (lowest risk category) would include foreign governments and government-related foreign investors.

Category--II FPIs include appropriately regulated entities, broad-based funds whose investment manager is appropriately regulated, university funds, university-related endowments and pension funds.