When Change Strikes
With SEBI mandating mutual fund schemes to recategorise and follow well-defined investment paths, it is time to review your portfolio.
Too much of anything is not good. That is what the market watchdog Securities and Exchange Board of India (SEBI) thinks about the mutual fund (MF) schemes flooding the market. The regulator wants to simplify them and bring down the number so that people can easily understand the underlying investment focus and choose them as per their requirements. In October 2017, SEBI came up with a framework, mandating all MF schemes to be brought under five broad segments and 36 categories under the segments. What's more, a fund house can launch only one scheme per category barring a few exceptions. Fund houses have been asked to align their schemes with the new framework within a stipulated timeframe. The final deadline has not been announced yet, but the players are already in action. Consequently, many MF schemes have either changed their fundamental attributes or got merged with others or simply changed their names to ensure better clarity. Here, we decrypt these changes and what investors should do about the schemes in their portfolios to stay aligned with their financial goals.
Over the years, fund houses have launched schemes galore which are either repeats of the existing schemes or slight variations, but most of them come with fancy names to lure investors. In fact, quite a few fund houses had multiple schemes in the same category. All these cluttered the entire MF space and became complicated for layman investors to understand the products in question. According to industry experts, the ambiguity that occurred due to the variety of scheme names will be largely sorted out and improve the performance of each scheme. "The industry was saddled with too many schemes that frequently overlapped with each other. Consolidation of schemes will enable fund manager to focus on one scheme in a category instead of multiple schemes. This should improve performance by increasing accountability," says Rahul Parikh, CEO of Bajaj Capital.
Others concur, saying that the new structure will enable investors to make more informed decisions based on the type, risk and category of schemes. "The MF scheme re-categorisation is a positive move as far as investors are concerned as it will bring uniformity and standardisation. In fact, the steps by the regulator to clamp down on the number of funds in a single category will be very helpful. It will be easy to compare schemes across fund houses, and investors can understand better the risks, returns and performances of their schemes," says Jiju Vidyadharan, Senior Director at CRISIL Research. Going forward, fund houses are permitted to have only one scheme of each type, except for index funds, exchange-traded funds (ETFs), fund of funds, and sectoral and thematic funds.
As fund houses begin to realign their schemes, investors are bound to face some disruptions initially. Here is how you can cope with the change.
In several cases, only names of the funds have changed without any change in fundamental attributes such as focus or investment style. For instance, Aditya Birla Sun Life Top 100 Fund will be known as Aditya Birla Sun Life Focused Equity Fund. Similarly, Motilal Oswal MOSt Focused 25 Fund will be rechristened Motilal Oswal Focused 25 Fund and UTI Opportunities Fund will become UTI Value Opportunities Fund. Simply put, schemes have been renamed for a better understanding of their investment objectives. If you find that only the name of the MF scheme has been changed, there is no need to be concerned.
Merger of Schemes
Some schemes have already been merged, and others may soon follow suit. While schemes under the same category are merged without any major shift in focus, some are also clubbed with funds from other categories. For instance, HDFC Premier Multi-cap Fund has been merged with HDFC Hybrid Equity Fund. The former was a pure equity fund, but it has been merged with a scheme in the hybrid segment which invests in both equity and debt.
Again, HDFC Prudence, one of the star funds in the hybrid category, will lose its identity as plans are afoot to merge it with HDFC Balanced Advantage Fund. Also, Reliance Mid and Small Cap Fund and Reliance Focused Large Cap Fund have been merged into Reliance Focused Equity Fund. The nature of the schemes and their benchmarks will change, as a result. If you have invested in equity funds to fulfil long-term financial goals and have a bigger risk appetite, a moderate programme might not suit you. In such cases, you need to evaluate your portfolio and take corrective action.
"Although the new measures bring about the much-needed simplicity and help sort the schemes, investors are still required to match their objectives and goals with the schemes' objectives, especially if the schemes have changed," says Santosh Joseph, Founder and Managing Partner of Bengaluru-based Germinate Wealth Solutions. But it is best done in consultation with your distributor or advisor to achieve maximum efficiency.
Change In Fundamental Attributes
Finally, there are schemes which have changed their fundamental attributes to fit in the new framework. For example, Reliance NRI Equity Fund, formerly a diversified large-cap equity fund, will now become Reliance Balanced Advantage Fund and fall under the dynamic asset allocation category. In such cases, you should take a holistic view of your portfolio. If the new mandate of the scheme does not match your expectations, it makes sense to exit. "It is imperative that investors review their MF portfolio and check if the reclassified schemes are aligned with their investment goals and risk-return expectations," says Vidyadharan of CRISIL Research.
Taxation: Before pressing the exit button, one must look at the tax angle. In case of equity or equity-oriented funds, any investment held for a year or less will attract short-term capital gains tax at 15 per cent irrespective of your tax slab. If you have held your investments for more than a year, you will have to pay long-term capital gains tax at 10 per cent for annual gains in excess of `1 lakh.
For debt funds or debt-oriented funds, monthly income plans, gold funds and fund of funds, the tax hit is high for capital gains made in less than three years. The amount will be added to your annual income and taxed according to your tax slab.
Exit load: Exit load is another factor that could dent your returns. Typically, all fund houses provide exit windows to investors. Check out the dates so that you can schedule your exit without paying any exit load.
The writer is a Mumbai-based freelancer