Explained: What are fundamental attributes of a fund and should investors act immediately when they change?

Mutual fund schemes change in character over a period of time. Regulatory diktats and changing market preferences over time can push funds to rework their mandates. However, some basic attributes are fundamental to the scheme and cannot be changed overnight. These attributes define the very nature of the scheme and how it is expected to function.

What are fundamental attributes?

A scheme includes three key elements that are fundamental – type, investment objective and terms of issuance of units. If a scheme decides to change the structure from close-ended to open-ended or change the category of the scheme, then it is considered as change of fundamental attribute. For example, many fund houses including Axis, DSP, HDFC, and PPFAS among others opted to shift their multi-cap schemes to the flexi-cap category. Such re-categorisation is considered a fundamental attribute change.

If the scheme proposes to change the way it invests money or the broad contours of asset allocation, then the same will be considered a change in investment objective and hence treated as change in fundamental attribute. Changes in the way units are listed or repurchased or redeemed is also treated as change in fundamental attribute.

Many fund houses opted for a ‘segregation of portfolio’ to tide over the possibility of a default on bonds held in their schemes. That too is considered as a change in fundamental attribute.

The process of change

In case a mutual fund wants to change a fundamental attribute, then a written communication about the proposed change is sent to each unit-holder and newspaper advertisements to that effect are published. Unit-holders of the scheme in question are given an option to exit the fund at the net asset value, without any exit load, within a period of 30 days. The fund house needs to ensure that the communication to unit-holders are sent and advertisements in newspapers are placed before the 30-day period starts.

“Investors allocate funds to a scheme to benefit from a particular investment strategy. If the investment strategy is going to change or some other attribute that may not suit their investment objective is going to change, then investors would prefer an exit option without being charged any exit load,” says Sirshendu Basu, Head-Products, IDFC AMC.

Scheme mergers

When two funds merge, the investors in the merging scheme are also given the exit option. However, the same event may not be a change in fundamental attribute of the surviving scheme if the fund house can establish that the interest of the investors in the surviving scheme would not be compromised. The fundamental attributes of the surviving scheme should also not be altered.

Change of exit load, expense ratio, change of name of the scheme without changing any of the aforesaid fundamental attributes are not considered major changes and there is no need to follow the process of allowing an exit-load free window to existing investors.

What should you do?

Though investors are offered the exit option without any load, the sale proceeds are subject to taxes on capital gains booked. Some changes are just enabling provisions and aimed at protecting investors’ interest in the future. For example, insertion of enabling provision of segregation of portfolio in case of default is a step to protect investors’ interest and not a sign that the scheme may necessarily witness a default.

“If the scheme in its new form fits into your portfolio designed as per a financial plan, then you need not sell, just because there is an exit load free option to sell,” says Amol Joshi, founder of Plan Rupee Investment Managers.