If you are an existing investor in mutual fund, you may have received emails from your mutual fund companies informing you about certain changes in the schemes that you have invested. Chances are high you might not have opened the email and in case you did, you did not read it completely or did not understand what it meant. This blog is for you to understand what these mutual fund changes mean and what impact these changes may have on your investments.

Why the changes?

To begin with, let us first understand the reasons

behind these changes. There are many schemes offered by same mutual fund companies with almost similar investment objective and similar investment style. Companies keep coming up with new fund offers to collect more money from the investors. All this leads to a clutter of mutual fund schemes creating confusion in the minds of investor. To reduce this clutter and empower investors with better means of comparing, SEBI issued a circular asking mutual fund companies to categorize their schemes. To read the full circular, click here.

What are the changes?

SEBI introduced five categories of funds namely, Equity, Debt, Hybrid, Solution Oriented and Others. As the name suggests equity and debt will invest in equity and debentures respectively. Hybrid would consist of invetments in both equity and debt in varied proportions. Solution oriented would cater to specific solutions (e.g. retirement) and have a lock-in period to meet that solution.

In this section, I will tell you about the details of equity category. I will cover debt schemes categorization in my next blog. Equity has been divided into large cap, mid-cap and small-cap. SEBI has clearly demarcated large cap as the first 100 companies in terms of full market capitalization, mid cap as 101st to 250th companies and small cap as all those from 251st onwards. To know more about market capitalization, click here.

Equity Funds have been divided into ten types:

Multi Cap Funds: Schemes investing a minimum of 65% of their assets across largecap, midcap and smallcap stocks.

Large Cap Funds: Schemes investing a minimum of 80% of the assets in largecap category of stocks.

Large and Mid Cap Funds: Schemes investing in both largecap (minimum 35%) and midcap stocks (minimum 35%)

Mid Cap Funds: As the name suggests, schemes investing a minimum of 65% of assets in mid cap stocks.

Small Cap Funds: Schemes investing a minimum of 65% of assets in small companies.

Dividend Yield Funds: Schemes investing in dividend yielding stocks

Value Funds: The schemes in this category will follow the value style of investment. Schemes investing a minimum of 65% of assets in equities which the fund manager believes are undervalued.

Contra Funds: Schemes investing a minimum of 65% in equities where the fund manager follows contra style of investing.

Focused Funds: Schemes investing in a maximum of 30 stocks. The scheme would mention which market cap it tends to focus (multicap, largecap, midcap, smallcap).

Sectoral/ Thematic Funds: As the name suggests, schemes investing a minimum of 80% of assets in a particular theme or a sector.

ELSS (Equity Linked Saving Schemes): Schemes investing a minimum of 80% of their assets with a lock-in period of three years.

How do the changes impact you?

These changes though largely may appear cosmetic in nature, will have implications on your investments. The impact that it may leave on your investments can be understood as below:

The Positives:

  • Fewer Choices: Yes, I do consider this as a positive. Often, I have come across investors choose a large number of funds to achieve what they have been told as ‘diversification’. In my previous blog too, I had mentioned that you do not need to invest in lot of funds to achieve better returns. With schemes merging into others, the universe of available options will reduce thereby making it simple to invest.
  • Better comparison: No more comparing apple to oranges. With clearly demarcated categories, it will be easy for an investor to compare performance of various schemes.
  • Better adherence to investment mandate: It was not uncommon to see fund managers stray away from the mandate in accordance with the market movements. This will now be curtailed due to specific guidelines.

The Negatives:

  • Possible lower outperformance: With the universe for stock selection significantly reduced, the chances of a fund manager consistently delivering better alpha (outperformance) will be reduced. For example, a large cap fund manager now has only 100 stocks to choose from. This would make it extremely difficult for him to beat the index.
  • Lower Liquidity: With categorization based on full market capitalization (which includes promoter and other locked-in holdings), there may be situations with lower liquidity in certain stocks with high promoter holdings. This may have an adverse impact on scheme performance.
  • Higher churn: The portfolio will witness a higher churn due to changes in market capitalization forcing some companies into midcap from large / small and vice versa. The fund manager will have to make changes to ensure compliance of the scheme objectives.

What should you do?

Get a comprehensive portfolio review done. There is a high chance that some of the schemes that you have invested in has undergone a change in its objective or investment universe. This might significantly alter your risk-reward profile. To avail our portfolio review services free of cost, please write to me at alok@alreadylate.com with details of your investments. If you want to know about impact on any particular scheme, write the name of the scheme in the comment section.

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  1. A detailed analysis on how to go about the changes in your mutual fund scheme????????Brilliant one sir ????????

  2. Wow detailed note, helpful…

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