It was the 1960s and the cold war was at its peak. A race was organised between two top runners—one from the United States (US) and the other from the Soviet Union. The US runner beat his Soviet counterpart. The Soviet media needed to report the news positively. The spin it gave was, “Soviet finishes second, US runner ends second last.”
This episode is now part of the broader folklore about Cold War-era propaganda. It illustrates how information can be spun to influence public perception. It also highlights spin doctors ’ role in presenting factually correct but misleading statements.
Let me turn to the Indian mutual fund (MF) industry. It scores very high on transparency and has set standards for the world to follow. One reason MFs are popular is the availability of independent ratings that come from media houses and specialised research entities. The spread and democratisation of social media means far more research. It is now done by many more big and small entities that can easily access information on every MF scheme from public forums, download it, and process it as desired.
In this sea of transparency, some areas could do with more of it. For example, the price of gold (used in benchmarks) depends on four variables: the price at the London Bullion Market Association (LBMA); conversion to rupees at the Reserve Bank of India reference rate; taxes in India; and shipping costs.
The final price is derived by applying a formula that utilises these parameters. While the first two parameters are publicly available, the latter two are not, making it difficult for investors to determine the final price on their own.
Many hybrid MF schemes have combination benchmarks: for example, 65 per cent equity, 15 per cent composite debt, 10 per cent global securities, and 10 per cent gold.
While equity benchmark data may be accessible, composite debt index, global securities index, and gold prices often are not. This makes it hard for an investor or researcher to compute specific hybrid benchmark values.
As the MF market deepens, more investors are employing sophisticated strategies to optimise their risk-adjusted returns. The need for greater transparency in providing data for calculating hybrid benchmark values or gold prices has become paramount.
Index providers in India’s securities market are covered by a global-standard regulatory framework. It encompasses rules for accountability, dispute resolution, governance norms, disclosures on conflict of interest, and a code of conduct. It already provides for the dissemination of index information to “subscribers”, whether free or paid.
Truth be told, more transparency never hurts. In the race story, even if the data on how many people ran the race and their timing had been provided, it may not have made a significant difference. Access to media was tightly controlled in communist Soviet Union in those days. But today, social media gives instant access to data. It’s freely available to all. Peddling such a distorted version of events would lead to widespread ridicule of such an entity.
Some of the MF products mentioned above may not be systemically important today, but they are growing rapidly. It is crucial that this data be made public. Academics and investors will then be able to use it to do their own research and challenge wrong conclusions.
A very senior MF professional informed me that this demand for greater transparency has not been raised before, hence this article.
The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta