Cut the cackle in the caveat, SEBI directs fund houses

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SEBI's move comes at an important time as dozens of mutual funds have surfaced in recent times, each one of them trying to outdo the rest in luring potential investors with promises of rewards.

Presently, the standard warning that is read out or flashed at the end of all mutual fund advertisements - "Mutual Fund investments are subject to market risk, read the offer document carefully before investing" - is so fast that it becomes virtually incomprehensible to the listeners or viewers.

To curb this trend and protect the interest of small investors, SEBI, after consulting the Association of Mutual Funds in India (AMFI), has issued a circular, mandating all fund houses to read or show the standard warning in the audio and audio visual advertisements in an easily understandable manner.

"The rapid-fire manner in which the standard warning is recited in the audio visual and audio media renders it unintelligible to the viewer/listener," the circular read.

According to the circular, all fund houses, from April 1, 2008, will have to stretch the standard warning up to five seconds instead of the current rapid-fire manner.

Presently, almost all fund houses announce or show the standard warning for 2-3 seconds at the end of an advertisement spot that is normally 15-20 seconds long.

In the initial years, when mutual funds surfaced in the market, they were not required to carry the standard warning. However, subsequently, they were required to put up the standard warning in print advertisements.

And, it was only in 2005 that SEBI made it mandatory for mutual fund advertisements on television or radio to carry the standard warning.

SEBI had then said that the disclaimer "shall be displayed on the screen for at least two seconds in a clearly legible font size, covering at least 80 percent of the total screen space and accompanied by a voiceover reiteration."

"The remaining 20 percent space can be used for the name of the mutual fund or logo or name of the scheme, etc.," the market watchdog had said.

"The above statement shall be displayed in black letters of at least 8 inches height or covering 10 percent of the display area, on white background," it had said.

Though SEBI's directive has been welcomed, yet, many fund houses felt that overall advertising cost could go up by 15-20 percent if the time duration for the standard warning is stretched by another 3-4 seconds.

"While the move is in the investor's interest, we feel that there should be a level-playing field between banks, insurance companies and mutual funds. In a 10 second advertisement, if 5 seconds are for the disclaimer, then what will it communicate?" wondered Jaideep Bhattacharya, CMO, UTI Mutual Fund.

"Our costs would go up but this is something we will have to comply with," said Arindam Ghosh, CEO, Mirae Asset Management.

"An ad spot is usually for 20 to 25 seconds. If we had to increase the time by another three seconds to carry the caveat, the overall advertising cost could go up by at least 15 percent," said an official with a leading mutual fund company.

"Although this is an excellent move by the regulator from the investors' point of view, the decision is bound to hurt the profitability of asset management companies. Instead of making changes at the superficial level, the regulator should direct changes at the investment level," the official said.

A marketing head of another fund house complained that SEBI's order made fund houses uncompetitive compared to insurance companies.

"Insurance companies use the caveat 'Insurance is a subject matter of solicitation' to market insurance products that also include unit-linked insurance plans," the official said.

"There are no rules mandated by the Insurance Regulatory and Development Authority (IRDA) on its duration. Even the Hindi version of the line that insurers use is short," he added.

According to a top executive of another fund house, the duration of a warning can never ensure that investors have understood the real risks behind investing. "However, all we can do is to adhere to SEBI's directive," he said.

The economic boom in India has attracted hordes of retail investors to the mutual funds, which, in turn, are flooding all forms of electronic media with commercials to attract investments.

Presently, the Indian mutual fund industry has 33 players managing assets worth over Rs.5,48,000 crore ($137 billion).