Mutual funds in a new avatar

Investors must be given an exit option when a scheme makes drastic changes in its mandate, portfolio or strategy

If you’re a regular mutual fund investor, you would have probably been deluged by mailers lately. In October 2017, SEBI had asked all Indian funds to rejig their open-end schemes to meet its new categorisation and truth-in-labelling norms. Following this, the 40-odd AMCs have been reviewing their entire list of schemes to change their names, types, portfolios and strategies, wherever needed, to comply with these norms.

When any scheme makes drastic changes in its mandate, portfolio or strategy, defined as its ‘fundamental attributes’, it is necessary to get back to all its older investors in writing and give them an exit option.

This is why most fund houses have issued letters and newspaper ads about scheme changes in the last two months. If you have missed them, visit the AMC website and dig out the appropriate ‘addendum’. Here’s a simple guide to what you should do after that.

Change of name, type

Some of the open-end schemes you have invested in are more or less already compliant with SEBI’s norms. In such cases, AMCs have simply tweaked the scheme’s ‘name’ or ‘type’ to slot it into SEBI’s categories.

Quantum Long Term Equity Fund, for instance, has seen only a minor name change to Quantum Long Term Equity Value Fund.

Aditya Birla Sun Life Equity Fund, Pure Value Fund and MNC Fund have only proposed changes in scheme type.

Where schemes have only changed their name or type, with no change to their ‘fundamental attributes’, you can simply sit back and relax, as your scheme is unlikely to see any material changes to its risk-reward profile.

Change in attributes

A majority of schemes, however, have decided to make changes to their ‘fundamental attributes’ — that is, their investment mandate, market-cap preference, asset allocation, strategy or style to comply with the new rules.

In these cases, AMCs are required to give the investor an exit option because the basic premise for her investment has changed.

But don’t jump to exit your fund just because you have an exit option. Your action should depend on the kind of change in the fundamental attributes.

One, some schemes with a loosely defined mandate have now clearly defined them to meet SEBI’s norms. For instance, ICICI Prudential Value Discovery Fund sometimes veered towards growth stocks in its earlier avatar, but has now been clearly slotted into SEBI’s Value Fund category.

Reliance Growth Fund will turn into pure-play Reliance Mid Cap Fund, with 65 per cent in mid caps.

In these cases, no action is required on your part, as the scheme will henceforth stick even more closely to its label.

Do watch for other tweaks though. ICICI Prudential Value Discovery and HDFC Equity earlier had leeway to take a 20 per cent cash call; this has been upped to 35 per cent.

Two, schemes that failed to fit neatly into any slot have opted to make changes to their mandate as well as market-cap preference, to slip into the slot nearest to the.

So, HDFC Top 200 Fund, earlier pegged to the BSE 200 index, will now change into HDFC Top 100 Fund,;Reliance Top 200 Fund will now transform into Reliance Large Cap Fund and ICICI Pru Focused Bluechip will now drop Focused from its name.

Such changes, while may not lead to massive upheavals in portfolios, may change its risk and return profile.

Both HDFC Top 200 and Reliance Top 200 will have to shrink their investment universe to the top 100 stocks in the market. This may reduce scope for excess returns, but curtail risks.

ICICI Prudential Bluechip will now be able to fish from the top 100 stocks and not own a concentrated portfolio. In these cases, you must assess if the fund’s lower risk profile suits you, and brace for slightly lower returns than before.

Three, some schemes with duplicated strategies have chosen to completely change their avatars.

You will find them overhauling all of their fundamental attributes — name, mandate, asset allocation and strategy.

The multi-cap SBI Magnum Equity is set to morph into SBI Magnum Equity ESG, a thematic fund.

HDFC Core & Satellite Fund, with a 80-20 split between established and less-known stocks, will mutate into HDFC Focused 30, a concentrated portfolio.

UTI Opportunities, a fund that piggybacks on select sectors, is set to turn into a Value Fund.

In cases such as these, where there’s a complete overhaul of the schemes’ strategy and style, it would be best to re-asses them as if you were buying them afresh. If the scheme’s mandate or allocation don’t suit you, exit.

Mergers

While scheme mergers are far fewer in number than fundemental attribute changes, these are most important to track because they may transform the chickens in your portfolio into swans, and vice-versa. This is especially true in cases where the merger of two schemes yields a completely new third entity.

If a scheme you hold is merging, take a hard look at the surviving scheme, to see if you would really like to buy it.

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