What Changed for Equity Mutual Funds After SEBI’s Re-categorization?

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It is official now! The SEBI’s new norms for re-categorization and rationalization of mutual fund schemes have resulted in some significant changes in the way the products were defined a few months ago. With all the merging, changing names, and attributes, things have twisted for several mutual fund schemes which are now trying to comply with the new norms.

Today, we will primarily see what significant influences were observed in the Equity Category after the re-categorization. And, further, we’ll let you know about the aspects you should watch out for and the ones that you can ignore. Let’s start the process without any ado!

What Could Possibly Be the Case?

1. The fund may have changed its category and fit well in the other one so well that it required no change at all. A simple name change could also be a case here, whereas, there could be no change at all too in a few of the cases. For instance, Franklin India Bluechip was shifted into the large-cap category or ICICI Pru Value Discovery was classified as a value fund. Such changes have not affected the schemes in any way.
2. A fund may have undergone some changes in the attributes. For all such schemes, an exit period was introduced by the AMC, so that people who were not happy with the after effects can exit their investment smoothly. The two significant changes are

• There was a slight change in the Scheme Information Document (SID), though nothing concerning strategy.
• There is a necessary change introduced in the strategy itself.

For instance, Kotak Balanced Fund will remain a balanced fund but will now be referred to as an aggressive hybrid. The new category will allow it to invest around 80% in equities. On the other hand, SBI Magnum Equity Fund has now become a thematic fund which is indeed a significant change. Such funds have introduced an exit period. Of all the funds with an exit period, every one out of five funds changed significantly that require explicit attention.

What were the Important Changes?

Talking of changes after re-categorization, any of the following changes can be possible in the case of equity mutual funds.

1. There is an increase or decrease in the number of large/mid/small cap stocks to comply with the new norms.
2. The fund has changed its asset allocation, typically in case of equity/debt/gold funds or has brought in derivatives.
3. The fund has changed its investment strategy that it earlier adopts in terms of stock picking or concentrated sector exposure.
4. The fund has changed to become a thematic fund and have reduced the no. of stocks it holds.

All such changes can somewhere influence the risk-return ratio of the fund; therefore they are required to be checked.

What Should the Investors Do?

• Investors who have invested in the old large/mid-cap category funds and are willing to continue doing so can check with their respective advisors from a year now to see where their investments are heading.
• In case the investment is made in large-cap and mid-cap funds whose categories have been shifted now, the check should be made to maintain the asset allocation as per one’s previously made allocation. Although it might take some time to depict the actual picture, thus it would be better to avoid any knee-jerk response and check for changes after at least a quarter, i.e., after September 2018.
• If the large-cap fund that an investor has previously invested in has been shifted to a new category, then such changes don’t state that he/she should increase large-cap exposure by making new investments. It is perfectly fine until the fund still has higher exposure to large-cap stocks (in case of large & mid-cap funds and multi-cap funds).
• Further, for diversified or multi-cap funds, things have remained pretty much similar, and therefore investors should not react to the changes.

What Should the Investors Avoid?

• Investors should not, in any case, stop their SIP investments unless their financial expert advice to do so.
• They should not compare their funds’ performance with that of their respective peers for at least 3-4 quarters.

How Can We Help in the Situation?

We will assure to keep a watch over the strategy changes and the consequent performance changes. We have always gone beyond merely looking at returns when looking at the portfolio quality and investment strategy. The experts associated with us will continue to do so with heightened vigilance. For a personalized recommendation, we would suggest you connect with us via phone call and get the best guidance.