Our grouse with the mutual fund industry continues. At a time when the industry is evolving into launching more 'innovative' products (read high risk thematic funds), the quality and presentation of information disseminated by the fund houses hasn't kept up at the same pace.
As a research team that sifts through hundreds of factsheets to discover the best funds for investors, lack of standardisation in the information flow makes our job that much more challenging.
Pick up mutual fund factsheets at random from three fund houses and you will understand what we mean when we say that the quality of information needs to improve and get a lot more standardised.
The reason why we urge you to look at factsheets from different fund houses is because in itself a factsheet may strike you as informative and even comprehensive, but when you get down to comparing factsheets across fund houses, the inconsistency is glaring.
Below, we have outlined the most relevant information points where we have noticed a lack of standardisation.
1. Expense ratios
Most fund houses are only too happy to talk of the 'amazing returns' their funds have generated. But ask them about the expenses that they have incurred to put in that performance and there is a caginess and even resistance in disclosing those numbers.
In developed markets like the United States, there is a research industry that prides itself on selecting funds that give the best performance at the lowest expenses. In India you have a research industry that only wishes it could pride itself on doing the same thing.
If you ignore few exceptions, like Franklin Templeton and PruICICI Mutual Fund, most fund houses do not disclose the expense ratios in their monthly factsheets. The expense ratio disclosure is made through a press release on a half-yearly basis.
A common refrain from most fund houses for non-disclosure of expense ratios is that the compliance is mandatory on a half-yearly basis. Our response to that is that the disclosure of portfolios is also a part of quarterly compliance, but most fund houses do disclose them on a monthly basis.
The same level of transparency needs to be extended to other important information.
2. Sector/company alignment
Aligning companies according to relevant sectors/industries is also something that is crying for standardisation. Also sector names across fund houses are disparate. Sample this -- DSP ML Equity Fund includes HCL Infosystems under Hardware, while Sundaram Capex Opportunities regards it as IT (information technology).
Even in terms of sub-sectors, there is a disparity. For instance, DSP ML Mutual Fund has a distinct sector for software, while Sundaram Mutual Fund bundles software in IT. So in Sundaram Mutual Fund's factsheet TCS and Infosys (which are software companies) are in the same sector (IT) as HCL Infosystems (a predominantly hardware company).
Apparently, AMFI's attempt to standardise the alignment of companies and sectors is not part of mandatory of compliance so most fund houses are not abiding by it. The one fund house we know that adheres to it classifies Videocon (with a comment that the company is currently engaged in oil exploration) under the 'Lotteries' sector in line with AMFI's classification!
So we guess AMFI needs to first get its sector-company alignment in order before expecting fund houses to adhere to it. Another inconsistency is in the names of sectors. For instance, fund houses refer to 'Oil' and 'Energy' interchangeably as also 'Consumer Products' and 'Consumer Non-Durables', 'Industrial Machinery', 'Industrial Products' and 'Engineering.'
From the investor's perspective he is unable to make a meaningful comparison across fund houses as he is not sure of the sector name to begin with and the companies that form part of that sector.
3. Portfolio churn
Information on 'Portfolio Churn/Turnover' is another piece of information that is not easily available. And when it is available, considerable time is spent in trying to unravel the formula behind it. To begin with not many fund houses give the 'Portfolio Churn' details, with HDFC Mutual Fund, Franklin Templeton Mutual Fund and JM Mutual Fund being the exceptions.
Even then there is no standardisation in the methodology to calculate the portfolio churn. For instance, HDFC Mutual Fund's and Franklin Templeton's equity funds have a Portfolio Churn ratio based on last 1 year performance.
On the other hand, JM Mutual Fund's portfolio churn is based on last month's performance. So while there are only three fund houses disseminating their portfolio churn ratios, even they are not comparable.
4. Average maturity
Ask any debt fund analyst and he will tell you how important the average maturity detail is while taking a call on whether to invest or not to invest in a particular debt fund.
Unfortunately, even this information is not widely dispersed by fund houses. Some fund houses mention 'modified duration' while some like DSP ML Mutual Fund mention the 'effective duration'. Again the investor is the loser as he can't take an informed decision on which debt fund merits investment.
In our view, it is AMFI's responsibility to step in and define the basic information that must make it to the factsheet and the manner in which this information is calculated and displayed.
Over a period of time, the 'basic information' list can evolve to include more details, but right now there are no two ways that something must be done urgently to ensure that the investor's interest is not compromised in terms of quality of information.
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