Introduction

The Securities and Exchange Board of India (SEBI), the regulator of India’s capital markets, has recently introduced a significant regulatory framework concerning the advertisement and performance disclosure of investment schemes that promote Compounded Annual Growth Rate (CAGR)-based returns.

The increasing use of CAGR figures in marketing and investor presentations by Mutual Funds (MFs), Portfolio Management Services (PMS), and Investment Advisers (IAs) has led to regulatory concerns. Misrepresentation or cherry-picking of CAGR data often misleads investors about the real risk-return profile of products.

To curb such practices and ensure transparency, SEBI has issued detailed rules for CAGR-based schemes, focusing on performance disclosures, risk disclaimers, and standardized return computation methodology.

🔍 What is CAGR and Why it Matters?

📌 Understanding CAGR

CAGR (Compounded Annual Growth Rate) is the measure of an investment’s mean annual growth rate over a specific time period longer than one year. It represents what the return would be if the investment had grown at the same rate every year.

📌 Why Is It Important?

CAGR smooths out volatility and market fluctuations, making performance appear more linear than it actually was. Hence, it can overstate or understate true investment risk, especially if there were sharp ups and downs during the investment period.

📘 Scope and Applicability      

✅ Applicable Entities:

• Mutual Fund Houses

• Portfolio Management Services (PMS)

• Investment Advisers (IAs)

• Alternative Investment Funds (AIFs) (where CAGR is used in communication)

• Research Analysts and WealthTech platforms

❌ Not Applicable:

• Informal agents or unregistered apps

• Peer-to-peer lending platforms (unless registered under SEBI)

• Corporate bond issuers or private placement issuers

📚 Key Highlights of the SEBI Rules

1. 🔢 Standardization of CAGR Calculation

• CAGR must be calculated using NAVs at the beginning and end of the investment period.

• Periods must be clearly specified: 1-year, 3-year, 5-year, and since inception.

2. Mandatory Additional Metrics

Alongside CAGR, the following must be disclosed:

• Standard Deviation

• Sharpe Ratio

• Alpha and Beta (where applicable)

• Maximum Drawdown

This is to prevent misrepresentation of CAGR as a sole performance indicator.

3. Risk Disclaimers and Benchmarks

• Risk disclosures must include volatility statements.

• A benchmark comparison must accompany any CAGR claim, e.g., Nifty 50 TRI, Sensex TRI.

• If performance exceeds benchmark CAGR, reasons must be clearly stated.

4. 📊 No Selective Period Disclosure

Cherry-picking high-performance periods (e.g., post-COVID rally) is prohibited. Full-period CAGR disclosure is mandatory.

5. 🔎 Audit Trail & SEBI Review

• Periodic audits of advertisements will be conducted.

• Non-compliance can attract monetary penalties, suspension of advertising rights, or cancellation of licenses.

💼 Rationale Behind SEBI’s Directive                                                     

1. 🛡️ Investor Protection

Investors are often influenced by seemingly attractive CAGR figures without understanding market risks, volatility, and intervening drawdowns.

2. 📈 Reducing Mis-selling

Distributors and agents have used high CAGR returns (especially in bull markets) to oversell equity schemes, even to conservative investors.

3. 📏 Standardization of Disclosures

SEBI wants uniform disclosure practices to improve comparability across fund houses and investment strategies.

4. 🌐 Digital & Social Media Regulation

With the rise of FinTech platforms and influencers, many unregulated actors have been misusing CAGR to push investment products. SEBI’s rule indirectly restricts this.

Implementation Guidelines

📌 Timeline:

• Mandatory from April 1, 2025

• All marketing material (digital and print) must comply

• PMS & IAs to update past performance documents within 60 days

📌 Documentation:

• CAGR computation sheets

• Benchmark comparison records

• Marketing compliance certificate (signed by Compliance Officer)

📌 SEBI Portal Submission:

Registered intermediaries must upload their CAGR performance data quarterly on the SEBI monitoring portal (XBRL-compliant).

⚖️ Legal and Regulatory Implications               

📌 Under SEBI (Mutual Funds) Regulations, 1996:

• 
  Rule 36(1): All promotional material must be “fair, accurate and not misleading.”

📌 Under SEBI (Investment Advisers) Regulations, 2013:

• Regulation 15: No misleading or unsubstantiated claims regarding returns or performance.

📌 SEBI Circular – CIR/IMD/DF/21/2012:

• Any return performance must be shown net of expenses, and must include disclaimers.

⚠️ Non-compliance Penalties:

• ₹1 lakh to ₹25 lakh under Section 15HB of SEBI Act

• Suspension of PMS/IA license

• Public reprimand and delisting from AMC platforms

Case Study: Misuse of CAGR

A popular PMS showed a CAGR of 19.5% for 3 years, cherry-picking performance from April 2020 (post-COVID bottom).

Upon SEBI’s audit:

• True CAGR (from Jan 2019) was only 11.3%

• Volatility (Std Deviation) was 18%, with 2 significant drawdowns

SEBI ordered the PMS to issue a correction advertisement, and imposed a fine of ₹10 lakhs.

💰 Investor Implications

✅ What to Look For:

• 
  Check volatility, maximum drawdown, and benchmarks

• Avoid schemes that don’t show 1-year, 3-year, and since inception CAGR

• Ask your adviser for audited return sheets and disclaimer notes

❌ Red Flags:

• Overly smooth CAGR graphs

• No mention of underperformance periods

• Use of CAGR without indicating market volatility

Expert Commentary

📣 SEBI Chairman:

“Returns can no longer be sold in isolation. Performance must be contextualized with risk and market benchmarks.”

📣 Market Analyst:

“This is a significant shift that will make investment communication more ethical and aligned with global best practices.”

🌐 Global Comparison

🇺🇸 USA – SEC (Securities Exchange Commission):

• Requires TWR (Time-Weighted Return) disclosure

• CAGR allowed only with full risk disclaimer and standard deviation

🇬🇧 UK – FCA (Financial Conduct Authority):

• Advertising returns must use Annualized Volatility

• Benchmarks like FTSE All Share must accompany all CAGR projections

🇸🇬 Singapore – MAS (Monetary Authority of Singapore):

• CAGR allowed only with past performance disclaimers and IRR alternatives

India is now aligning closely with global regulatory frameworks.

Way Forward for Financial Institutions

✅ Actionable Compliance Steps:

1. 
   Review All Marketing Material

2. Recalculate CAGR as per SEBI norms

3. Prepare Comparative Benchmark Data

4. Insert Mandatory Disclaimers

5. File Updated Performance Reports

6. Train Distributors and RM Teams

7. Implement Marketing Approval Workflow

8. Use SEBI's Reporting Portal Quarterly

💼 Technology and Automation

Financial institutions should invest in tools to:

• Automate NAV tracking and CAGR computation

• Build compliance checklists for advertisements

• Generate real-time reports for performance vs. benchmark

• Monitor employee-level communications

📝 Conclusion

SEBI’s move to regulate CAGR-based schemes marks a major milestone in the journey toward transparency, investor protection, and standardization in India’s financial ecosystem.

By enforcing clear guidelines on how CAGR is presented and understood, the regulator is ensuring that investors receive complete, comparable, and contextual performance data — not just attractive numbers.

This also increases the responsibility of fund houses, advisors, and PMS providers to uphold ethical communication standards and avoid mis-selling practices.

As India’s investment market grows and retail participation increases, such reforms will be critical in ensuring sustainable growth, trust, and global recognition.

Created & Posted by Twinkle Jha

Operations Head at TAXAJ

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