The Association of Mutual Funds in India (AMFI) has issued a circular highlighting the maximum returns asset management companies (AMCs) can show to illustrate the power of compounding.
Several AMCs have calculators to estimate the returns an investor could get in the future. Enter the investment amount (lumpsum or SIP) and the time frame, and it throws up a projected end value. The problem is that these calculators don’t use a uniform returns percentage to arrive at the end value.
AMFI has now specified the maximum returns (in terms of compound annual growth rate or CAGR) that AMCs can use to explain the power of compounding for specified mutual fund categories or situations.
For equity funds they can use Sensex (12.64%) or Nifty (12.93%) returns. For fixed-income funds, the 10 year GSec can be used as the benchmark and 7.20% for calculating returns. This figure is derived from the “mean of 10-year rolling return between 1 June 2013 and 30 May 2023″. These returns will be reviewed annually to factor in movements in the benchmark.
The circular said, “AMCs may use tools such as goal planning, and SIP/STP/SWP calculators which permit investors to select the return from a range of returns starting from 2% to 13% for understanding the compounding effect, so long as such tools are not used to depict returns of any particular MF scheme.”
Similarly, AMFI has also specified returns under different allocations between equities and debt for hybrid funds and multi-asset funds.
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All these are for ‘non scheme-related materials’ which means these promotions must not contain any scheme-specific information. These are meant to provide conceptual clarity to investors for educational purposes.
AMFI also said that all illustrations must contain a standard warning and a disclaimer stating “past performance may or may not be sustainable in future and is not a guarantee of any future returns”.
Nirav Karkera, head of research at Fisdom, said this move will make the industry’s practices more uniform and reduce the scope for mathematical creativity to sway investors. However, he added, “Extending hard caps computed on the basis of historical performance to such DIY tools may concern some sets of investors who are seeking to simply gain a sense of how the math would work in various expected scenarios.”
Ravi Saraogi, a registered investment advisor and co-founder of Samasthiti Advisors, said the returns specified by AMFI seem aggressive as they are based on data from the past 10 years, during which time the markets have had a great run. He added that for debt returns, too, the 7.2% return is high.
“Currently, this number looks fine as we are in an interest rate upcycle. However, when inflation moderates and the RBI lowers rates, this number will look very aggressive. AMFI has said it will revise these numbers based on market conditions. Hopefully such revisions will happen on a timely basis.”