Navigating Performance Disclosure Rules for New Mutual Fund Schemes

Consider a client who walks into your office, excited about a New Fund Offer (NFO) that was launched just eight months ago. They are eager to see the scheme’s ’track record’ and ask you to compare its performance against a well-established index over the last three years. As an MFD, you must immediately pivot the conversation to reflect the regulatory reality: you cannot provide a three-year performance track record for a scheme that simply hasn’t existed for that long.

SEBI guidelines are uncompromising in this regard to prevent the creation of misleading historical data where none exists.

For schemes that have been in operation for less than three years, the regulatory framework prohibits the display of point-to-point returns for any period exceeding their actual existence. This ensures that a scheme launched only months ago cannot ‘annualize’ its limited returns to mislead investors into thinking it will maintain that trajectory over the long term.

If you were to present a hypothetical projection based on these few months of data, you would be violating the core principle of fair disclosure. Your value as an MFD lies in helping the client understand that short-term performance is often a function of market timing rather than long-term manager skill, and that historical data for new funds is intentionally limited to protect their decision-making process.

When evaluating a new fund, focus your client’s attention on the fund manager’s investment philosophy and the scheme’s fundamental attributes instead of chasing short-term return charts. Use the time to explain why regular plans are beneficial for their specific profile, emphasizing that while direct plans exist, your ongoing support, behavioral coaching during market corrections, and continuous monitoring of the portfolio’s alignment with their goals provide value that far outweighs the expense ratio difference.

By maintaining these strict disclosure standards, you establish yourself as a professional who prioritizes compliance and investor education over the temptation of ‘selling’ a product based on incomplete or aggressive performance claims.

Always remember that for a fund with less than one year of history, the safest and most compliant route is to avoid highlighting return percentages altogether. If the scheme has existed for more than one year but less than three, you may present the data for the actual period of existence, but you must strictly avoid extrapolating that performance into the past. Protecting the client’s interests starts with presenting the truth about a fund’s age, which is the cornerstone of building long-term professional trust.

Nuance

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This is a companion read for Section 4.2 — Role of Securities and Exchange Board of India from Ace the NISM Mutual Fund Distributors Exam by Akhilesh Gururani, available on Amazon Kindle.

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