Better disclosures required

Suresh Krishnamurthy

MUTUAL funds differ from one another in investment style, size of the schemes and performance.

But what does not vary is the quality of disclosures. They are, in general, vague, clumsy and likely to be extremely difficult for a retail investor to make sense of. If the disclosures in the newspapers are aimed at keeping the retail investor informed, they too fail miserably on that count.

For starters, the disclosures do not explain satisfactorily the changes in NAV. The growth in NAV over the year needs to be explained in terms of various parameters, such as profits booked, losses booked, unrealised gains and unrealised losses.

The SEBI-mandated disclosures do not achieve this purpose. The difference between the per unit NAV at the end of the period and the beginning of the period in addition to the dividend declared per unit is in all cases not equal to the sum of net income per unit, transfer from reserves per unit and unrealised gains per unit.

Given that the base figure -- net assets -- is changing by the day and given the added complications of growth plans and dividend plans, any attempt to engage in per unit reconciliation may be an exercise in futility.

In this backdrop, it would be better if the change is explained in percentage terms -- proportion of change accounted for by realised and unrealised gains. This can be further broken up into profits booked, losses booked, operating expenses, and so on. Without such meaningful disclosures, the publishing of abridged accounts on an annual basis will remain a farce.

Another important point is the need for uniformity in portfolio valuation. For an investor, separate disclosures of quantum of unrealised losses and the quantum of unrealised profits is a parameter containing meaningful information. This would be known to an investor only if the portfolios are valued on a stock-by-stock basis, with losses and profits aggregated separately.

However, most of the mutual funds, except Kothari Pioneer, Zurich India and Sundaram Mutual, indicate the unrealised gains on a net basis. These funds net the unrealised profits against unrealised losses, with the result that the exact quantum of unrealised losses and unrealised profits go unreported.

For example, if there is profit of Rs. 100 on stock A, and a loss of Rs. 50 on stock B, only the profit of Rs. 50 is reported on a net basis. However, the individual amounts of Rs. 100 and Rs. 50 contain meaningful information. As such, it may be in the fitness of things if SEBI mandates uniformity in portfolio valuation on a stock-by-stock basis.