11.5 SEBI Norms Regarding Representation of Returns

Why Presentation Is Regulated

Performance figures are technically true and practically misleading with alarming ease. Choose a start date, choose a period, omit the benchmark, annualise a short run — each is arithmetically defensible and each distorts the investor's understanding. SEBI therefore prescribes the presentation rather than relying on the figures being accurate.

The Core Rules

Absolute for under a year, compounded for a year and above

This single rule prevents the most common distortion. A scheme up 9% in four months cannot present that as roughly 29% annualised, because four months of data cannot support a claim about an annual rate.

Prescribed periods

Performance must be shown for a standard set of periods rather than a period chosen by the AMC — commonly one year, three years, five years and since inception. Presenting only the period on which a scheme looks strongest is precisely the selectivity the norms prohibit.

Benchmark comparison is mandatory

The benchmark's return for the identical periods must be shown alongside the scheme's return. A performance figure without its benchmark is not a performance disclosure; it is a number.

Total Return Index basis

Benchmark returns must be computed on a Total Return Index (TRI) basis, which includes dividends paid by the index constituents. Comparing a scheme, which receives and reinvests dividends, against a price-only index would flatter every scheme by the dividend yield of the market. The TRI requirement, in force since 1 February 2018, removed that systematic bias. This is developed further in section 12.2.

Standard investment amount

Point-to-point returns must be shown on a standard investment amount as prescribed, so that an investor can see what a defined sum would have become and can compare schemes on identical terms.

Schemes with a short record

A scheme in existence for less than one year may not present returns in the standard annualised manner, since a short record is not a meaningful basis for an annual figure.

The mandatory caution

Every performance presentation carries the statement that past performance may or may not be sustained in future, alongside the standard advertisement warning that mutual fund investments are subject to market risks and that all scheme related documents should be read carefully.

Additional Disclosure Requirements

• Performance of all schemes managed by the same fund manager must be disclosed, so an investor can see the manager's full record rather than only their best scheme.
• Scheme performance disclosure in the prescribed format on the AMC website, covering all schemes.
• Discontinued or merged schemes cannot simply disappear from the record; performance history requirements prevent selective survivorship in disclosure.
• Where a scheme's fundamental attributes or benchmark change, the presentation must make the change visible rather than presenting a continuous series as though nothing altered.

What Is Prohibited

Where Distributors Get This Wrong

The norms bind AMCs directly. They also bind distributors, because material a distributor creates and circulates is an advertisement.

The recurring breaches:

• A self-made chart of a scheme's best two-year run, circulated on a messaging group
• Screenshots of returns with no benchmark and no caution
• "This scheme gave 42% last year" quoted without the category or benchmark context
• Presenting an SIP's CAGR rather than its XIRR, or the reverse, whichever looks better

The safe rule is simple: use AMC-approved material. It has been prepared to comply with the norms. Material a distributor builds independently almost never satisfies the period, benchmark, TRI and caution requirements simultaneously, and a screenshot of it is durable evidence of the breach.

CAGR and XIRR Are Not Interchangeable

The norms require compounded annualised returns for periods of a year and above, and the measure used depends on the cash flow pattern.

CAGR applies to a single investment with a single exit. It answers: at what constant annual rate did one lump sum grow?

CAGR = [(Ending value / Beginning value) ^ (1 / years)] - 1

Example: INR 1,00,000 grows to INR 1,61,051 over 5 years
CAGR = [(1,61,051 / 1,00,000) ^ (1/5)] - 1
     = (1.61051) ^ 0.2 - 1
     = 1.10 - 1 = 10.00% per annum

XIRR applies where money went in on many dates, which is every systematic investment plan. Each instalment has been invested for a different length of time, so no single beginning value exists and CAGR cannot be computed. XIRR solves for the single annual rate that makes the present value of all the dated cash flows equal to the current value.

Why the distinction is examinable. For a SIP running through a rising market, the simple total-gain percentage looks small relative to the true annualised rate, because the average rupee has been invested for roughly half the elapsed period, not the whole of it. Presenting a SIP's performance as though it were a lump sum understates it; presenting a lump-sum return as though it were an XIRR overstates it. Either way the figure is wrong, and SEBI's prescribed formats exist to stop the choice being made opportunistically.

When an investor asks what their SIP has returned, the honest answer is the XIRR, and the account statement or AMC portal will compute it.