Why your Best Mutual Fund Schemes may not remain as ‘the best’? | Categorization & Rationalization of MFs

We always want the best in our lives and we always like to give the best to our beloved ones. It is applicable to personal life as well as personal finances.

We would like to invest in the best mutual fund schemes, best real estate property, best bank fixed deposit, safest investment option, best Demat Account, best life insurance scheme, best health insurance scheme and the list goes on….

Whether you are an Advisor or an investor, the important parameters to shortlist the top performing mutual funds are ‘past performance’ of the MF schemes (returns) and also the data related to ‘risk ratios’.

What if there is a case where past performance may become irrelevant? What if your Funds’ investment strategy and objective itself change? Or your Funds’ portfolio allocation undergoes a sea change??

All these changes are happening due to SEBI’s recent guidelines on ‘Mutual Fund re-categorization’.

All these years, SEBI/AMFI have been allowing multiple funds under same fund categories from same AMCs, in order to bring the desired uniformity across mutual funds and to standardize the various MF scheme categories, the SEBI through Mutual Fund Advisory Committee has issued new guidelines on ‘new Categorization of Mutual Fund Schemes.’

As per these new norms, only one scheme per category would be permitted. The mutual fund houses have already started implementing these re-categorization rules. (Related Article : ‘Mutual Fund Schemes Categorization and Rationalization – Types of MF Schemes | SEBI’s Latest Guidelines‘)

To meet these new guidelines all the mutual fund houses may have to merge, modify or close their available schemes. This is the main reason that I am yet to publish the ‘Best Equity Mutual Funds 2018’ article.

How & Where to find the information related to proposed Fundamental changes to Mutual Funds?

Whether you are an existing investor or a new investor, suggest you to kindly visit the respective fund house websites and access the link related to Notices/Downloads/Addendum section to get information on ‘MF re-categorization’.

For example :

• HDFC Mutual Funds Website -> Downloads -> Notices -> Kindly click on ‘Notices’ like ‘Notice for Change in Fundamental Attributes of Select Equity & Hybrid Schemes’.
• Aditya Birla Mutual Fund house website -> Forms & Downloads -> Addendum -> 2018 -> ‘Notice-cum-addendum dated 14.04.2018 – Categorization and Rationalization of the Schemes of Aditya Birla Sun Life Mutual Fund.’
•  SBI Mutual Fund AMC Website -> Forms & Downloads -> Notices & Addendums -> ‘SBI Mutual Fund – Addendum – Scheme Categorization.’ 
• DSP Balckrock AMC -> Quicklinks -> Downloads -> Notices & Addendums.

You may kindly visit below links as well to get consolidated list of Mutual Fund Changes across almost all AMCs;

MF Re-Classification & Your portfolio of Best Mutual Fund Schemes

Below are the important information that you need to look for in the above links ;

• Change in MF Scheme name : All the fund houses have been re-naming most of the existing MF schemes to meet the norms laid down by the SEBI. In case, only the name has been changed and there has been no change in the fundamental attributes of a scheme then there is nothing much to worry about! 
  • For example :
    • Aditya Birla Sun Life Enhanced Arbitrage Fund is going to be renamed as Aditya Birla Sun Life Arbitrage Fund
• Are there any Fundamental Changes to MF Scheme’s Attributes? :
  • Change in Investment Objective : Under this scenario, chances are there that the name of the Scheme and its investment objective are going to change.
    • For example : Aditya Birla Sun Life Small & Midcap Fund is going to be re-named as Aditya Birla Sun Life Small Cap Fund.
    • The Fund’s current investment objective is – “The Scheme seeks to generate consistent long-term capital appreciation by investing predominantly in equity and equity related securities of companies considered to be small and mid-cap. The Scheme may also invest a certain portion of its corpus in fixed income securities including money market instruments, in order to meet liquidity requirements from time to time.
    • The proposed Investment objective of the fund is – “The Scheme seeks to generate consistent long-term capital appreciation by investing predominantly in equity and equity related securities of Small cap companies.”
  • Fundamental Change in Investment Strategy : Besides a change in name of the scheme, there can be a change in proposed investment objective and strategy as well.
    • For example : SBI Emerging Businesses Fund is going to be renamed as SBI Focused Equity Fund.
    • It is going to be a n open-ended Equity Scheme investing in maximum 30 stocks across multicap space.
    • There is a change in its investment strategy as well – “The fund will now follow a bottom-up approach to stock-picking and invest in companies across market capitalization and sectors. The fund will take high conviction bets and the total number of securities would be equal to or under 30.”
  • Change in Fund’s Portfolio Asset Allocation : There can be a change in the way the fund’s corpus is being allocated across different Financial Instruments and Asset classes. 
    • For example : Let’s go through current and proposed Asset Allocation of ‘HDFC Mid-cap Opportunities Fund.’
    • Current Asset Allocation : 
    • Fund’s proposed new Asset Allocation :
  • Merger of two or more Schemes : If you have invested in a fund and it is going to be merged into another similar fund then you need to analyze the investment objectives and strategy of the ‘surviving scheme’ and take investment decision accordingly.
    • In one of my recent articles – ‘Best ELSS Tax Saving Mutual Funds 2018-19‘, I have mentioned that Birla AMC has multiple ELSS funds and there is a chance that ‘Birla Tax Savings Fund’ can be merged into ‘Birla Tax Relief ’96 Fund’. As predicted, Aditya Birla Sun Life Tax Savings Fund is going to be merged into Birla Tax Relief 96 Fund. (In this case, Aditya Birla Sun Life Tax Relief ’96 is referred to as ‘surviving scheme’.)
    • Another example is – UTI Bluechip Flexi-cap Fund is going to be merged into UTI Equity Fund.
  • Change of Fund category or investment theme : If this is being proposed then it is a very big change to watch out for! There will be a change of Fund name, type of Scheme, fund category, portfolio allocation etc., In this scenario, you need to analyze the proposed features of the scheme and if it does not match your investment objective(s) and risk profile, you may have to come out of it and re-look at your investment portfolio.
    • For example : SBI Magnum Equity Fund is going to be renamed as ‘SBI Magnum Equity ESG Fund’. It is being proposed to be positioned as a Thematic fund from its current large-cap oriented fund. The Fund is going to invest in diversified basket of companies following Environmental, Social and Governance (ESG) criteria only. So, obviously there will be a change in its benchmark index as well.

Gist of Tax Implications :

Almost all the fund houses have mentioned that these proposed changes are to be effective from 3rd or 4th week of May, 2018. During this period, you as an investor can take a decision to remain invested in the schemes, switch-out from the schemes or redeem your exiting Scheme units.

Let’s understand the tax implications under these scenarios ;

• Merger of Schemes :
  • As per the amendments, allotment of units in Surviving Scheme, pursuant to merger, to Unit holders of Merging Scheme who decide to continue will not be considered as redemption of Units in Merging Scheme and will not result in short term / long term capital gain / loss in the hands of the unit holders. So, there won’t be any tax implications.
  • However redemption of units from Merging Scheme and/or switch-out of units of Merging Scheme to any other schemes of the Fund during exit window shall be considered as redemption in Merging Scheme and will result in short term / long term capital gain / loss in the hands of the Unit holders depending on the period of holding of the investment. Hence, taxes on capital gains (if any) are applicable.
• Switch out : In case you decide to switch from one fund to another fund during the prescribed period then transactions are treated as normal redemptions and capital gains (if any) can be subject to taxes.
• Redemption of units : Same as above. (Related Article : ‘Mutual Funds Capital Gains Taxation Rules FY 2018-19 (AY 2019-20) | Capital Gains Tax Rates Chart.’)

Kindly note that Exit load is not applicable under all types of scenarios during the prescribed period. (The fund houses have been sending emails to all the existing investors about the proposed changes to mutual fund schemes. Suggest you to go through them without fail!)

My opinion

There are thousands of MF schemes to choose from. It is pretty confusing and challenging for an investor or advisor to shortlist right set of mutual funds for investments. There are multiple schemes with same investment objectives, strategies and portfolio allocation within the same Fund house.

The SEBI’s new norms will de-clutter the offerings. It will ensure to cut-down the number of available schemes across different fund categories. The SEBI might be proposing a well stated ‘templates’ for portfolio allocation which may limit the number of choices or opportunities for a fund manager to pick from. But, let’s presume that good fund managers will do good in any regulatory environment.

If there are any changes in objective and strategy of a Fund, then past performance may become irrelevant. We may have to consider it as whole new fund with new benchmark and new set of Peers for making a comparison.

It takes time to get the relevant Data (returns and risk data) to make a comparison among the Funds within the same category and also the funds with respective benchmarks and so on….

If you are an existing investor, do not panic if you see poor performance (or indifferent performance) being reported by your fund in the near future, be patient! If you have invested in a fund and if there are any minor changes being proposed, you may better off remaining invested and keep a track of its performance for next couple of years.

Examples :

• HDFC Top 200 Fund is going to be renamed as HDFC Top 100 Fund. It has always been a Large-cap oriented fund. The only difference now is – the fund currently invests primarily in top 200 companies by market capitalization. It is now being proposed to invest in Top 100 companies by market capitalization. Event though there is a change portfolio allocation, the investment strategy is more or less the same.
• SBI Magnum Balanced Fund is going to be renamed as ‘SBI Equity Hybrid Fund’ with almost same investment objectives and strategy.
• Aditya Birla Sun Life MIPII – Wealth 25 Plan is going to be renamed as Aditya Birla Sun Life Regular Savings Fund with similar investment objective, strategy and portfolio allocation.

In case, there is a total change of investment theme of a fund and if it does not match your investment objectives then you may consider moving out of such schemes from your portfolio.

If you are a new investor looking to shortlist a few right and best mutual funds or an existing investor who wants to add some more funds to your portfolio, kindly do not go by the Star ratings given in MF research portals (or) do not go by the ‘best mutual funds list’ available on various online platforms blindly (including my blog).

This can be even more a challenging task in case of ‘Debt Funds’. If you would like to invest a portion of your investible surplus in Debt funds then you may keep it simple and short by investing in Liquid and/or Ultra Short Term Debt funds (for short and medium term goals). You may pick Dynamic Debt funds for your long-term goals.

Whether you are an advisor or investor, you now need to put lot of efforts and do deeper research to pick best mutual funds. Things are not going to be easy to select top performing mutual funds with very less past data being available.

Continue reading :

Mutual Fund Investments are subject to Market Risks! – My opinion

Are there any Investment Options which are really THE BEST?

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) 

(Post first published on : 16-April-2018)