SEBI regulates advertisement in Mutual Funds- will it work?

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.

5 Responses to “SEBI regulates advertisement in Mutual Funds- will it work?”

  1. Advertisement » SEBI regulates advertisement in Mutual Funds- will it work? Says:

    […] Original post by Amol Agrawal […]

  2. Ankit Sharda Says:

    I subscribe to your opinion that making the warning ‘Mutual Funds are subject to…’ more pronounced or legible would not go a long way in ensuring that people make rational decisions. But, I don’t think the purpose of displaying this caveat or warning is to induce people to act rationally rather it is to inform them about the inherent market risks associated with the investments they are entering in.
    After conveying the risks involved if people still want to go ahead and invest its pretty much their wish.
    So, SEBI is right in its own way when it says that transmission of information should be proper and target audience should be able to make sense out of it.

  3. Amol Agrawal Says:

    Why do you need more information — To make rational decisions. Isn’t it? SEBI makes MF declare this warning for the same reason.

    However, my point is that this statement will not work. How many people understand risk? Financial literacy is different than literacy and formewr is found to be absent even in developed societies. Moreover, none of the MF advertisements show a person taking a risk but highlight the return side (happy families, prosperity etc). Hence, the risk message will most likely be lost.

    There is no doubt that SEBI is right in making sure the information is transmitted. However, what is also important is that people understand the information. The risks are taken without understanding the same. That is the point I wanted to make.

  4. HmmBut Says:

    So what do you suggest? Add some deadbeats who lost money in mutual funds to these ads. It’s not a bad idea you know 😉

    They could use this video as a template. They just need to Indianise it 😉

  5. Mc Cain Says:

    Advertisement always work and it may also work this time. Lets take a chance and see what happens.

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