- Transparency refers to how clearly investors can see the securities held by an investment fund such as an ETF or an MF
- Transparency makes an important factor while making an investment decision
What is Transparency?
Transparency is a metric that defines how much access an investor has about a company’s financial information like market depth, price levels and financial results. Investors make their investment decision based on the level of this transparency.
An ETF will have a basket that is disclosed upfront because it matches a benchmark index’s makeup in weightage and securities, while an actively-managed fund will not be as transparent because the fund manager oversees the portfolio and any changes in its makeup.
Importance of Transparency
As mentioned earlier, transparency makes an important factor while making an investment decision. Since, future growth of a company depends upon how it invests its funds today. So, it becomes necessary for the investors to know where a company is making its investments. If an investor is not able to find this information, he/she becomes less likely to do investment in the company.
Investors must be aware about all the underlying investments in their portfolio. For example, an investor must know the risk that is involved in his mutual fund investment owing to different securities and whether it is in sync with the risk appetite of the investor.
It is also useful for investors to regularly compare the returns on their investments with a benchmark or the returns offered by similar investments to know the performance of their investments.