Capital markets regulator Securities and Exchange Board of India (SEBI) has told mutual funds (MFs) not to promise returns to investors. A letter dated March 3 to the Association of Mutual Funds of India (AMFI – the trade body for the MF industry) reminded AMFIs to comply with the advertising code as part of SEBI MF regulations.

It said it had encountered examples of MFs distributing brochures and pamphlets that convinced investors that they would receive a fixed amount of money if they combined the Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP).

An SWP is an instrument through which you can withdraw a certain amount of funds each month. In contrast, a SIP is a facility where you invest money regularly (usually monthly). While mutual funds are not legally guaranteed returns, SWPs are a popular mechanism for earning regular returns; the facility has become popular with retirees in recent years due to increased awareness.

Promising returns, or giving the impression that this is a reliable way to earn a regular income, is another matter. This is where the problem lies. SEBI seems to have come across brochures and illustrations being peddled, giving the impression that returns are guaranteed if you say start SIP, then start SWP after three years or so. SWP can withdraw funds from your funds if your plan’s net asset value (NAV) is not growing consistently.

As per SEBI MF regulations, no mutual fund can guarantee returns. Since all mutual funds invest money in the stock and debt markets, NAV is affected by market ups and downs. In this case, promising returns don’t make sense.

SEBI also does not favour showing illustrations about future returns based on assumptions in the fine print. “In this regard, you are hereby advised to communicate with all AMCs to refrain from such practices in the future and to remove such advertisements/brochures/presentations and booklets from all media and advise their dealers not to use such advertisements/brochures /presentations and booklet,” SEBI said in a letter to AMFI.