Mutual Funds to Display 10-Year CAGR in Ads: AMFI

The Association of Mutual Funds in India (AMFI) has directed Asset Management Companies (AMCs) or fund houses to display only the 10-year compounded annual rolling returns prescribed by it for showcasing investment returns in their advertisements.

In March 2023, markets regulator the Securities and Exchange Board of India (SEBI) stated that the advertisements by a few AMCs did not comply with the letter and spirit of the provisions in the Advertisement Code prescribed under SEBI (Mutual Funds) Regulations, 1996.

A few of the advertisements and brochures tend to be misleading for investors while creating an impression that they would receive fixed returns; this includes the case of Systematic Investment Plans (SIPs), by projecting a Systematic Withdrawal Plan (SWP) as a multiple of SIP. There were a few illustrations that depicted future returns based on assumptions and projections.

The markets regulator had suitably advised the AMFI to direct all the  AMCs to dissuade from such disclosures or advertisements that are unclear and likely to be misconstrued by the investors.

The AMFI guidelines prescribe that numerical illustrations can be used in the case of SIP, SWP, or STP calculators to highlight the power of compounding. These illustrations can be given for fund categories such as equity, fixed income, hybrid funds, and multi-asset funds alone.

Moreover, the numerical illustrations can only highlight CAGR returns mandated by the AMFI.

In the case of equity schemes, AMCs can highlight maximum past returns of 12.64% for the S&P BSE Sensex and 12.93% for the NSE Nifty. According to the AMFI, the basis of computing this rate is the mean of 10 years of rolling returns between June 1, 2013, and May 30, 2023.

At the same time, the maximum past returns for fixed-income funds is set at 7.2%, based on 10-year Government Securities (G-Secs). In addition, AMFI has introduced maximum past returns that can be highlighted for different styles of hybrid funds.

In the case of equity-heavy hybrid funds, which comprise 75% equity and 25% debt, the maximum returns highlighted can be 11.5%, and for an equally balanced hybrid fund, the maximum returns can be 10.07%. 

Similarly, the case of debt-inclined hybrid funds, which comprise 25% equity and 75% debt, the maximum prescribed returns are 8.56%. In the case of multi-asset funds, which comprise equity at 40%, debt at 40%, and gold at 20%, the cap for returns is set at 9.92%.

The AMFI has mandated that none of the illustrations used by AMCs can highlight returns higher than those prescribed. In addition, the AMFI has clarified that AMCs could use tools such as goal planning and SIP, STP, and SWP calculators, which permit investors to select returns from a range of returns starting from 2% to 13% for understanding the compounding effect. 

However, the mutual funds regulator has specifically stated that such tools could be used as long as these are not used to highlight the returns of any particular mutual fund scheme.

On an annual basis, the returns prescribed by AMFI for the purpose of numerical illustrations in non-scheme-related materials would be reviewed based on the performance of the benchmarks.