As per the directions in the recent circular by SEBI, mutual fund companies have had to rename, re-categorize, and rationalize mutual fund schemes offered by them. In the lieu of these changes, what should a retail investor do?
As per the circular there could be a change in the name, category or investment strategy of the fund. The circular has impacted both the investors as well as the Asset Management Companies (AMCs).
Impact on Mutual Fund Investors
With this initiative, SEBI seeks to simplify the investing process for common investors.
Rationalisation and re-categorization of mutual fund schemes across different fund houses shall enable simplicity and ease in identification and simplification in the selection of the correct mutual fund.
By reducing the plethora of mutual funds available under each mutual fund category, the scope for confusion will be mitigated.
To take a simple example, assume that a large-cap fund is reclassified as a large and mid-cap fund.
Now it will impact the investors by increasing their overall portfolio risks.
Investors who would have invested in a large-cap scheme to take on a lower risk would have to either increase their risk appetite or change their investment.
The following are the possible impacts of the abovementioned changes on the investors-
Simpler Selection of Mutual Fund Schemes
Presently there are more than 1200 open-ended mutual fund schemes, many being exactly similar in nature. Such a large number of schemes causes confusion.
Henceforth, mutual fund schemes will have only one scheme representing a defined mutual fund category.
This will substantially reduce the total number of schemes and in turn reduce confusion in identification and selection of a mutual fund.
Need to Review Existing Investments
Many mutual fund schemes have undergone a change in their investment strategy, investment objective, have been merged with other schemes.
Therefore, investors may need to review and re-align their existing investment, if required to ensure that the changed investment objectives of the schemes match with their preferred investment objectives.
Funds within the same category shall henceforth have similar characteristics. Having only one scheme from a particular category and similar schemes across similar categories shall ensure easier comparison.
In the words of Stephan Groening, Director, Investment Solutions, Sharekhan, BNP Paribas “All schemes of different AMCs within a similar category will have similar characteristics, which will enable customers to make a better ‘apples to apples’ comparison.”
Possibility of a fall in Alpha or outperformance
The rationalization initiative shall ensure a strict classification in schemes as well as their investment strategy. This will lead to adherence to fund’s mandate.
Earlier some large-cap schemes would invest in mid-cap stocks to generate greater alpha and outperform the benchmark. This would become difficult under the latest guidelines. As a result, some schemes might witness a decline in their alpha- outperformance of the fund as compared to the benchmark index.
In the short-run, this may seem like a negative. However, in the long-run, systematic and disciplined investing is expected to lead to a fair and positive value creation according to the true mandate of the scheme.
Renaming means no change in existing investments
Some schemes have only undergone a change in their names, without any change in their investment objective or strategy.
In such a case, investors need to worry about such changes. Moreover, they need not re-position or shift their investments.
Everything remaining the same, a change in the name of a mutual fund scheme shall enable better identification of the scope and objective of the scheme.
From now on, mutual fund schemes cannot make a drastic change in their investment styles, without intimation to the investors. This will ensure that the fund managers stick to the investment mandate to achieve the defined investment objectives.
Thus, there will be increased certainty that the chosen scheme matches the investor’s risk profile.
Till now there was a lack of a single common definition across the mutual fund industry. Each fund house gave their own, different definition for various terms.
Now with a single uniform definition across the mutual fund industry, this problem shall be largely solved. All fund houses shall follow the same definitions and therefore investors would not have to bother with checking the definition of each scheme for different players separately.
Some mutual fund houses have brought about changes in their naming and rationalization of funds are
Reasons for Change
SEBI wants to reduce confusion for investors and simply decision making around selection and identification of mutual fund schemes.
So, as per new circular one, mutual fund company can have only one scheme under each category.
To know further, read why are mutual funds being renamed?
Rationalisation and re-categorization of mutual funds is a positive step in the right direction. According to many analysts, the circular is investor-friendly.
It will aid the investors in proper identification, comparison, and selection of different mutual fund schemes. It will make the life of many small investors a lot easier in terms of reducing confusion and encourage them to participate in the mutual fund bandwagon.
To see the best mutual funds to invest from every category-
The 30 Best Mutual Funds to Invest in 2018 – Groww 30.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.[Sassy_Social_Share type="standard"]