What investors must know as SEBI refrains mutual fund companies from running deceptive advertisements?

New Delhi: Investors inclined to put their earnings in mutual funds tend to get carried away with promises of high returns that often do not materialize.

The Securities and Exchange Board of India (SEBI) has written to the Association of Mutual Funds in India (AMFI) instructing the fund companies not to mention guaranteed returns in their advertisements. SEBI, in its letter, observed that fund houses include certain illustrations in their advertisements, presentations and brochures, thus, leading investors to believe that they will be receiving fixed returns for their investments.

According to AMFI, such advertising is vague and likely to be misleading to investors, thus violating both the letter and spirit of the SEBI regulations.

The letter reads, “Illustrations are shown depicting future returns on the basis of assumptions and projections. The disclaimer and assumptions are made in fine print that will likely be missed by the investors,” adding, “It has been noticed that some of the Asset Management Companies are indulging in practices relating to advertisements, which are not in letter and spirit compliance with the Advertisement Code prescribed in SEBI (Mutual Funds) Regulations, 1996.”

Various asset managers have to date created eye-catching illustrations that projected returns on their monthly Systematic Investment Plan (SIP) investments for roughly two decades in a dire attempt to increase sales.

Apart, the illustrations in the letter also highlight the use of Systematic Withdrawal Plans (SWPs) to demonstrate consistent returns. Many personal financial analysts have underlined how predictions based on yesteryear returns have caused many investors to expect very high returns from their mutual fund investments. This can be understood with the help of an example. Returns from the stock market were considerably high, thus, resulting in exceedingly good mutual fund performance. However, in 2022, the markets showed red, exhibiting an extreme fall in returns across all market caps, thus, causing investors to lose their investment capital. This explains why investors should be careful about promises when launching mutual funds.

Investors must be aware of certain essential factors before investing in mutual funds. These include:

Stock investments

Mutual fund houses invest in the securities of publicly traded companies. The returns from any mutual fund, therefore, reflect the total returns generated by the stocks of those companies.

No fixed returns

Mutual fund companies do not offer the concept of “guaranteed returns” when investing in stocks or stock-like products.

Risk and reward

Risk and return are always two sides of the same coin. This is a universal investment principle that investors must be aware of before making their investment choices. If you want higher returns, you need to take more risks. One does not exist without the other.

Historical returns

The past returns provided by mutual funds mirror their past performance. However, this does not guarantee future profits from these mutual fund houses.

Bond investing

Bonds, debt funds, fixed deposits and other risk-free investments are good options for investors looking to earn guaranteed returns. Considering how mutual fund investments are subject to market risks, it becomes imperative for investors to opt for risk-free investment choices.

Many investors are unaware of how investments work, thereby, resulting in a deep misunderstanding regarding their performance in the long run. The focus, therefore, must be on insisting on transparency in their working and procedures.