What is your first reaction to new risk norms and dividend plans?
I believe that the new circular on product labelling and the subsequent changes to the Risk-O-Meter is a huge step forward in the communication process of funds with their investors. We all think it is a business of returns, while it is actually a business of managing risks. The new norms now bring out the risks at a scheme level. The process leads to us being able to quantify the risk of a fund. Since we will calculate it monthly, the investor will gain immensely from this transparency and will know if there are major deviations in the risk profile of the fund going forward.
Though I do understand the logic behind the new process of dividend labelling, my personal opinion is that the communication process will need to be simplified even further than what has been laid down.
Do you think it’s comprehensive since it covers equity, debt, gold, RIETs? Do you think that the existing risk meter was not effective in communicating?
From what we had earlier this is definitely a big change. There is a clear laid down procedure for all asset classes and it also goes one step further in defining the risk score of most of our portfolio components. I am sure once it is put into practice any miss out, if any, would get factored in soon. The parameters that are taken into consideration are fairly well thought off and would bring out the risks of the schemes in a far more comprehensive manner.
If you look at the recent past, there has been enough debate on the risks associated with debt funds not being portrayed well to investors. The beauty of the process now is that within a category, the difference in risk between funds will also stand out. The investor would find it easier to come to a conclusion on the risk-adjusted return for each scheme. Hence, it is a far superior tool than the previous process.
The equity risk assessment takes into account market cap, impact cost etc. Do you think it’s too complicated for regular investors to understand?
The investors should not get into the calculation and confuse themselves. Since the calculation parameters for all schemes within categories would be the same, the investor should look only at the final outcome as this would reflect the risk associated with the respective scheme. In fact, it now becomes easier for the investor as the whole process of going through each portfolio and assessing risks independently, need not be done anymore.
Earlier, the entire equity was put into one risk parameter and was not differentiating the difference in risks between, say, the large cap and the small cap. Now that gets addressed and hence the need for a higher risk category in the risk o meter. I also feel that once this process gets practiced for some time, the need for further improvement, if any, will also get implemented.
Will mutual funds be able to convey the new risk metrics properly to investors without scaring them?
Understanding risks is a journey and it is a process for every investor. A superior investor is one who is successful in matching his or her risk profile to that of the portfolio components. It is not easy to do and it takes time. Some of us who have been investing for some time went through a big renewal of risk profiling due to Covid. Some of the risks that unfolded has got many pedigreed investors thinking.
I think it is in the selfish interest of funds to convey the new risk metrics in a proper and transparent manner. If one gets investors who understand the risk of the fund and then invests, the industry would get the right kind of investors into the various schemes. This would lead to the journey ahead for the overall industry to be a far more mature one than that of the past. I am looking forward to this new Risk-O-Meter and I have no doubt in my mind that the industry will take this to a different level in communicating the right risks associated with each scheme.
About dividend labelling, do you think investors will be able to understand the various dividend options better? Some advisors believe this might confuse them further. What is your opinion?
As I said, the need for the dividend labelling is there. There are enough investors who do not know that it is their capital that can come back to them in the form of dividend. But I do feel that the present form, though being in the right direction, is a bit confusing and will need further simplifying.