Nudging: SEBI’s Risk-o-meter and change of names of Dividend payout Mutual Funds

SEBI has been busy trying to simplify investment in Mutual Funds (MF).

Under this new policy, it has asked all MF schemes to label their schemes based on risk-o-meter:

SEBI, based on the recommendation of Mutual Fund Advisory Committee (MFAC), has reviewed the guidelines for product labeling in mutual funds and the following has been decided:
a. Risk Level of a scheme will be depicted by “Risk-o- meter”, as shown below:
New Mutual fund 'Risk-o-Meter' (2020) by SEBI - FinMedium
b. For example, the risk depicted in the above risk -o -meter is Moderately High
c. Risk- o – meter shall have following six levels of risk for mutual fund schemes:
i. Low Risk
ii. Low to Moderate Risk
iii. Moderate Risk
iv. Moderately High Risk
v. High Risk and
vi. Very High Risk
Earlier all similar schemes were labelled as similar risk. So a large cap fund with stable stocks and another large cap fund with not as stable stocks were labeled similarly. Not any more as all the schemes will have seperate risk-o-meters.
Moreover, MFs will be required to update their risk-o-meters as and when the portfolio changes. All schemes will show risk-o-meters at start of the year, end of the year and number of times risk-o-meters has changed.
SEBI has also given risk weights to all the financial instruments which will lead to the final risk number of the MF scheme and its position on risk-o-meter.
This is an important policy nudge and hopefully will help investors make better choices.
In another circular, SEBI has proposed change in names of MF schemes which have the dividend option.  Whenever MF sell shares and price of the share is higher than its purchase price, there is a profit. This profit is transferred to Equalization reserve from which dividends are paid. The Equalisation reserve belongs to the unitholders and they need to be informed that “certain portion of his capital (Equalization Reserve) can be distributed as dividend”.
Notice SEBI refers investors as his!
SEBI has directed MFs to change names as follows:
  • Dividend payout option has to be renamed as “Payout of Income Distribution cum capital withdrawal option”,
  • Dividend re-investment will be renamed as “Reinvestment of Income Distribution cum capital withdrawal option”,
  • Dividend transfer plan is “Transfer of Income Distribution cum capital withdrawal plan”.
I am not sure whether investors (even the Hims) will understand this name change. SEBI could have chosen better names/labels.
This is a case of one good nudge and not so good for the other…

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