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nism-series-va-past-performance-disclosure-new-scheme[ MUTUAL FUND DISTRIBUTORS ]

An AMC is designing a marketing advertisement for a mutual fund scheme that has been in existence for exactly 4 months. Under SEBI advertising regulations, how must its past performance be represented?

[ A ]Past performance must be shown as an annualized CAGR extrapolated over a 10-year period.

[ B ]Past performance shall not be provided at all in the advertisement.[ CORRECT ]

[ C ]Past performance can be advertised using the benchmark index returns of the past 5 years.

[ D ]Past performance must be displayed by showing only the single best-performing week.

Takeaway

Option B is correct: Past performance shall not be provided at all in the advertisement.

Derivation

SEBI regulations on performance advertising specify clear existence thresholds: (1) Where a scheme has been in existence for less than 6 months, past performance shall NOT be provided at all. (2) If in existence for 6 months to 1 year, simple annualized growth rate for the past 6 months from the preceding month-end is shown. (3) If in existence for over 3 years, CAGR for 1, 3, 5 years and since inception (allotment date) along with point-to-point returns on Rs. 10,000 is mandatory. This question tests advertising rules. The primary error is assuming short-term returns can be extrapolated to CAGR.

Why the others fail

A — Past performance must be shown as an annualized CAGR extrapolated over a 10-year period.

Extrapolating 4-month performance into a long-term CAGR is misleading and strictly prohibited by SEBI advertising regulations.

C — Past performance can be advertised using the benchmark index returns of the past 5 years.

Advertising benchmark returns as a substitute for a newly launched scheme's performance is not permitted.

D — Past performance must be displayed by showing only the single best-performing week.

Cherry-picking the single best-performing week violates SEBI's mandate against deceptive and selective performance advertising.