The Securities and Exchange Board of India (Sebi) has asked fund houses to segregate their schemes into distinct categories, based on their underlying investment focus or style. It has allowed only one scheme per category, barring some exceptions. The exercise is aimed at helping investors identify schemes better suited to their specific needs and risk profile, and to narrow down the confusing multiple options under each category. To comply with Sebi’s norms, several funds have been repositioned .. renamed or merged. Given that this is an industry-wide exercise, it is likely that schemes in your portfolio too may have undergone changes. We decode these changes and outline the steps you may need to take to ensure that your funds remain aligned to what you need.
Changes—cosmetic and drastic
In several cases the changes are purely cosmetic and investors don’t need to worry about them. For instance, Mirae Asset India Opportunities Fund will now be known as Mirae Asset India Equity Fund and categorised as a multi-cap scheme. Franklin India Prima Plus will also fall in the same basket, and has been rebranded as Franklin India Equity. Meanwhile, Axis Equity has been rechristened Axis Bluechip to underscore its positioning as a large-cap ..
Then there are schemes that have been following a particular strategy or investing style for several years, and are now being categorised to reflect this investing style. “Many of the changes involve funds identifying their positioning correctly or aligning scheme names to their investing strategy,” says Sanjiv Singhal, CEO, Scripbox. For instance, Templeton India Growth has followed a value-investing style since inception, so its rebranding as Templeton India Value is just a change in nomenclat ..
Large mid-cap funds offer a mix of styles
The new large and mid-cap funds will include schemes from various categories.
Among bond funds, Aditya Birla Sun Life Treasury Optimizer Plan and SBI Treasury Advantage have been positioned as Banking and PSU funds while ICICI Prudential Regular Savings and Sundaram Income Plus have been designated credit risk funds. Unless the real identity of these schemes makes you uncomfortable, their name changes can be safely ignored.
In some cases, funds have assumed a revised mandate that seemingly involves changes in their fundamental attributes. But these funds have actually been plying a similar approach and the new positioning will only involve minor tweaks in their portfolio. “Not many schemes have seen sweeping changes in mandates. Several schemes are already largely aligned to their freshly defined mandate,” says Kaustubh Belapurkar, Director, Fund Research, Morningstar Investment Adviser India. For instance, Mirae Asset Emerging Bluechip, a mid-cap oriented fund with a track record of consistent outperformance, will now be positioned as a large-and-mid-cap fund.
According to the norms, it will be required to hold at least 35% of its corpus in each segment to be categorised as a large-and-mid cap scheme. However, it has always maintained a sizeable presence in the large-cap space. So, the fund manager will not have to make dramatic changes to the fund portfolio and the scheme should be able to maintain its risk-return profile. Similarly, ICICI Prudential Focused Bluechip will now be known as ICICI Prudential Bluechip and classified as a large-cap fund. Contrary to what its name suggests, it has long abandoned its focused approach and taken a diversified stance because of its growing corpus. So, the fund won’t suddenly alter its investing style. Also, it typically maintains more than 80% of its corpus in large-cap stocks, so its risk-return profile is not likely to be impacted.
Mergers will result in category shifts
Some schemes will merge to create a completely new fund offering with a fresh mandate.
Despite the benign nature of these tweaks, they are treated as changes in the fundamental attributes of a scheme. So, funds undergoing these changes are required to provide an exit window to existing investors who are not comfortable with the changes. “Since even minor changes to the fund’s structure trigger the exit window, investors should not consider all such offers as a sign of the fund taking a different colour,” cautions Vidya Bala, Head, Mutual Fund Research, FundsIndia.
Corporate bond funds can’t take high risk
Schemes in this category will have to maintain 80% of their corpus in AA+ and higher-rated instruments.
Some funds, however, will take on a completely different mandate, involving substantial changes in their investing focus or style. For instance, diversified fund Aditya Birla Sun Life Top 100 will morph into Aditya Birla Sun Life Focused Equity. SBI Magnum Global will shed its current mid-cap focus to become an MNC-oriented fund with no particular market-cap bias. It will now invest at least 80% of its corpus in companies with global ownership or those listed abroad with overseas revenue making up more than 50% of their total revenue. Similarly, HDFC Large Cap, which has had a concentrated portfolio, will now become a diversified large-and-midcap fund as HDFC Growth Opportunities. Investors need to be watchful of funds undergoing such major changes.
Returns may take a hit
The way fund categories have been defined, it is possible that even funds which continue to be in the same category as before will be impacted, say experts. Since funds will now mostly pick stocks from a strictly defined universe, they may not be able to reproduce the same results as before. A fund categorised as large-cap will now have to strictly invest 80% of the corpus in stocks ranking among the top 100 in terms of market capitalisation. This will impact fund managers’ ability to generate outperformance relative to the benchmark or alpha. “Large-cap fund managers’ ability to generate alpha will be tested as they will have limited flexibility to step beyond the confines of the narrow large-cap basket of stocks,” says Bala. The restricted investible universe will also impact performance of some of the duration funds in the debt segment. As a way out, several large-cap funds are now moving into different categories—large-and-mid-cap, multicap, etc. For instance, ICICI Prudential Top 100 is now ICICI Prudential Large and Mid Cap; UTI Top 100 is now UTI Core Equity; and Invesco India Growth is now Invesco India Growth Opportunities.
Many large-caps have changed mandates
Change in mandate allows greater freedom to invest outside the top 100 stocks by market cap.
What it means for investors
Whether you are a new investor or an experienced one, the revamp of schemes is aimed at making investing simpler. Investors should now be able to clearly identify the schemes they are getting into. The distinct segregation of funds based on their investing focus and style means that fund managers will have to stick to their chosen mandate. Earlier, funds with specific mandates used to stray into other segments in a bid to enhance their return profile, and this will no longer be possible. So a corporate bond fund will not be able to take unnecessary credit risk. A focused equity fund will not have a bloated diversified portfolio. “Earlier fund categories were rather loosely defined, allowing less clarity on a scheme’s exact positioning. Now, the investor should be able to make a more informed choice and know the exact role each fund will play in his portfolio,” says Kunal Bajaj, CEO, Clearfunds
But the revision in mandates and reclassification of schemes also comes with some challenges for investors. If the nature of the scheme has changed materially, assessing its performance or return profile will be a tricky affair for now. A drastic change in fundamental attributes, investing focus or style, will render the funds’ past track record irrelevant. The new positioning may require the fund manager to adopt a different approach, so his past performance with the same fund may not be a good guide for his future performance. “It is like re-setting the chess board midway through the game,” says Singhal. “If there is a significant change in a scheme’s mandate, it is best to ignore the past performance and wait for the fund to build a track record under the revamped strategy,” suggests Belapurkar. While the regulator has specified new rules to address issues around showcasing returns after the merger of schemes, it is yet to do so for schemes changing their investing style or entering a new category.
Also, due to reshuffling of funds from one category to another, peer-sets have undergone a change. For the time being, this will not allow for meaningful comparison of performance with other funds. Consider a fund that was focused on mid-caps but is now categorised as a large-and-mid-cap fund. It will carry its previous return profile into this new basket, which may also contain funds earlier tilted towards the large-cap segment. Given that mid-caps have outperformed large-caps over the past five years, the fund’s earlier mid-cap bias will give it an edge over its new peers in the performance charts.
Limited options for medium duration funds
Duration of bond fund portfolio needs to be 3-4 years, which has restricted their investment options.
To avoid getting taken by false impressions, experts argue that investors should avoid comparing a fund’s returns with peers for now. Considering that most of the funds which have changed mandate have also changed their underlying benchmark index, it would be a better idea to compare the fund’s performance with the index. This will allow you to gauge the fund’s past track record without worrying about the shift in its positioning. “Investors should stick to comparing fund returns with the benchmark and avoid comparing with peers for the next few quarters,” says Bala.
Portfolio review is a must
If you are looking to expand your mutual fund portfolio, experts suggest that you opt for schemes without significant changes in their attributes. But if you are holding funds that have undergone visible changes in their flavour, there is no need to panic and exit. “Review your mutual fund basket and check if it continues to be aligned to your needs,” says Belapurkar. The changes in schemes may have affected your portfolio at two levels. First, First, certain schemes may have seen a drastic shift in characteristics. If so, the role of those particular schemes may need to be reviewed—are they still aligned to your risk profile? Can they fulfil the goals for which you invested in them? For instance, if you had invested in a fund for its pure large-cap play but now find that it will be run as a large-and-mid-cap fund, you will be taking on higher risk by staying invested in it. A diversified equity fund that will now adopt a focused approach will also take the fund in a completely new direction. You may want to reconsider your investments in such funds, as they may not be suitable to your risk appetite. Use the 30-day exit window offered by the fund house to make a clean exit from such schemes, without attracting the exit load. However, keep in mind that such a sale may still attract capital gains tax, depending on the period for which you held the fund.
Even if a scheme continues to maintain its earlier positioning, it is advisable to track its performance closely in the coming months. This is particularly required for schemes under the newly defined large-cap or mid-cap categories, as they gear up for generating alpha without some of the earlier flexibility. “Monitor the scheme’s behaviour over the next 12 months to check if it is able to maintain its return profile,” says Bala.
It is possible that your overall asset mix may have changed after the reclassification of schemes. Review your portfolio to see if it has become skewed in favour of a particular segment at the cost of other segments. For instance, if a large-cap or a mid-cap scheme in your basket has morphed into a thematic fund, it may result in lower exposure to that segment. In such cases, you may have to add to your mid-cap funds to ensure the asset mix remains in order. Investors would do well to take the help of a financial adviser to shape their portfolio over the next few months.