Archive for February 28th, 2008

SEBI regulates advertisement in Mutual Funds- will it work?

February 28, 2008

India’s capital market regulator, SEBI has been in an overdrive mode for quite sometime. It has been passing regulations at a great speed.

This time it passes a circular on the advertising of Mutual Funds. It says:

The rapid fire manner in which the standard warning “Mutual Fund investments are subject to market risks, read the offer document carefully before investing” is recited in the audio visual and audio media renders it unintelligible to the viewer / listener. 

In order to improve the manner in which the said message is conveyed to the investors it has been decided in consultation with AMFI that with effect from April 1, 2008: 

  1. the time for display and voice over of the standard warning be enhanced to five seconds in audio visual advertisements. 
  2. in case of audio advertisements the standard warning shall be read in an easily understandable manner over a period of five seconds

In its earlier circular(in July 2003), SEBI had said:

In advertisements through audio-visual media like television, a statement “Mutual Fund investments are subject to market risks, read the offer document carefully before investing” shall be displayed on the screen for at least 2 seconds, in a clearly legible font-size covering at least 80% of the total screen space and accompanied by a voice-over reiteration. The remaining 20% space can be used for the name of the mutual fund or logo or name of scheme, etc.

So, SEBI has increased the time of the risk warning statement from 2 seconds to 5 seconds.

The rationale behind increasing the timing is that before people can understand the statement, it has already disappeared. So by displaying it for five seconds, people can understand that investment in MF is risky.

And the rationale behind the warning is that people do might not understand that risks are involved in a MF. Hence, the need for a warning.

I don’t really think that these warnings may help despite the best intentions to say so. The regulators believe that people are rational beings and can take care of their interests as long as information is widely and easily available. So, by issuing these warnings, they will evaluate the risks and take decisions accordingly.

However, numerous research in behavioral economics shows that it is actually opposite. Infact, people are predictably irrational and continue to make the same mistakes.

For instance, research tells me people start investing in equities when markets rises. Their investment is at its peak when the equity markets are also at their peak. The finance theory suggests people should be buying when equity markets are below fundamental values.

One can understand people making mistakes in 1991-92 when Indian economy was just opening up. but to see the same trend till 2006-07, suggests that people do not learn their lessons and invest in equity markets rises along with the indices and enter markets when risks are higher.  

Hence, to assume that people will act rationally by increasing the advertisement time might not work. Moreover, most of the advertisement would show a happy family, prosperous individuals etc the risk warning is more likely to be ignored.

Primers on Inflation

February 28, 2008

There are two good speeches explaining about inflation. First from Fed Governor Mishkin and Second by St Louis Fed President, William Poole.

Both are good primers on inflation.

Assorted Links

February 28, 2008

1. Bernanke presented his semi-annual testimony and presented the monetary policy to the Congress.

WSJ Blog summarizes Bernanke’s testimony. It also points to comments from experts at the Monetary Policy meeting.

2. Frankel says Euro might take over USD as reserve currency by 2015.

3. Mankiw points to an article on stagflation.

4. Rodrik on his early life as a political scientist.

5. DB Blog points to Easterly response to Bill Gates

6. TTR has an excellent post saying corporate leaders are not nobel souls as we believe them to be

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