Got an email from your mutual fund? It could be important

SEBI has over the years mandated that mutual funds inform investors of important changes via email, if it affects their money.

Many a time, investors get information pertaining to changes about the mutual fund schemes in which they have invested. Here we discuss some of the changes that often are communicated.

Mutual fund investors keep getting emails from mutual fund houses. These emails carry not only the statement of investments but also other important pieces of information pertaining to the fund manager’s outlook, changes in the risk -o-meter (a pictorial representation of the degree of safety or lack of it of your investment that was designed as per guidelines laid down by the Association of Mutual Funds in India), expense ratio and other things. In some cases, the fund houses are duty-bound to inform the investor about the changes, hence the communications. Here is what you should be doing with them.

Risk-o-meter

In September 2023, Tata Gilt Securities Fund announced a change in its risk-o-meter from ‘moderate’ to ‘low’. That of Aditya Birla Sun Life Equity Savings Fund was revised to ‘low to moderate’ from ‘moderate’ earlier. Baroda BNP Paribas Money Market Fund’s risk-o-meter was changed from ‘low to moderate’ to ‘low’. There are many such instances being reported by other fund houses also. These are just a few examples of a scheme's risk-o-meter changing, but such changes happen frequently.

The risk-o-meter was first introduced in 2015 by the Securities and Exchange Board of India (SEBI), the financial market regulator. However, in the aftermath of the credit crisis in 2018, the regulator decided to revamp it. The new version launched in January 2021 called for a dynamic risk-o-meter with six levels of risk, based on the actual risk level of the mutual fund portfolio.

The regulator made it clear that the fund houses must inform the investor about changes in risk-o-meter. When you get an email informing about changes in the risk-o-meter, there can be either an increase or decrease in risk taken by the fund manager. For example, in a rising interest rates scenario, a debt fund manager with a view that interest rates have peaked may raise the duration of the portfolio, thereby raising the risk level of the scheme.

In this hypothetical case, though the risk is going up, there is scope for higher returns if the interest rates come down.

While investing in a mutual fund scheme, especially on the debt side, it is better to pay heed to the potential risk class matrix (PRCM) of the scheme, which defines the maximum level of risk a fund manager can take. Within that ambit, if the risk-o-meter changes, it may not hurt the investor in most cases. Changing the PRCM is a change of the fundamental attribute and the fund house has to give an exit option to the investor without charging an exit load. But if your risk-o-meter changes, you don’t need to do anything unless you are extremely uncomfortable with the change.

Also read: Here's how to know if your debt fund can take risk

Expense ratio
The fund house must inform investors about changes in the expense ratio (which shows the proportion of a fund’s assets used for administrative and other operating costs). A separate expense ratio is computed for each plan (regular or direct) of the scheme, which is communicated to the investor. Other things remaining the same, a higher expense ratio eats into the returns generated by the scheme. In September, fund houses such as JM Financial, Canara Robeco and ITI announced revisions in the expense ratio of some of their schemes.

In most cases the revisions in expense ratio, whether up or down, are minuscule and may not have a material impact. However, a sustained rise in the expense ratio over a period of time may lead to an erosion in the scheme’s performance.

Viral Bhatt, founder, Money Mantra, a Mumbai-based financial services firm, says, “Much of the communication about the scheme, be it about changes in expense ratio or change in risk-o-meter, reaches the investor because it is mandatory to do so. Many of these changes are so small that they do not materially affect a small investor’s overall portfolio. However, if an investor is in doubt, then she can approach her advisor or the fund house for clarification.”

What Bhatt means is that if you get the expense ratio change email frequently, call up your financial advisor to know if cumulatively it makes a big impact. Remember, your fund sends you these emails only if you’re invested in them. This also means that if you have a tight and concise portfolio, it’s easier for you to keep track.

Exit loads

To discourage hot money entering and exiting mutual funds schemes, which are regulated pooled vehicles of money management primarily to serve the interest of retail investors, fund houses have been using exit loads. An exit load is expressed in percentage terms. For example, 1 percent of the amount withdrawn is payable if the investor decides to exit within, say, three months from the date of allotment of the unit.

For instance, Quant Teck Fund proposed an exit load of 1 percent for redemptions or switch-outs (including SIPs or systematic investment plans and systematic transfer plans or STPs) within 15 days from the date of allotment of units, irrespective of the amount of investment, effective from September 12, 2023.

Changes in exit loads do not affect investments made before the effective date. For example, if a mutual fund scheme with no exit load introduces one, those who had invested before it was implemented continue to hold their investments without exit load.

If there is a change of the fundamental attribute of a mutual fund scheme—be it the merger of mutual fund schemes, changes in PRCM, changes in asset allocation or even change of the sponsor of the fund house—the fund house is bound to offer an exit route without exit load. Recently, unitholders in schemes of IDBI Mutual Fund were given the exit option when the schemes were taken over by LIC Mutual Fund.

“When a fundamental attribute of a scheme is changing, the investors should assess the possible impact. It could lead to a change in the risk-reward associated with the scheme. The exit option is not mandatory and investors should exit if and only if they think that their interests may not be served well. Investors should consult their advisors before taking any action in such cases,” says Abhay Mathure, a Mumbai-based mutual fund distributor.

Fund manager changes

Often, fund managers of various mutual fund schemes change on account of resignation, retirement and even due to poor performance of existing fund managers. In that case it is prudent to avoid a knee-jerk reaction. Fund managers operate within the overall money management framework defined by the fund house. Fund houses also ensure a smooth succession by appointing more than one fund manager to manage each scheme. This ensures that there is continuity and the scheme performance does not suffer.

Though many times you may find the change a non-event, do open each email and try to figure out what is going on with your investments. Do consult your advisor, if need be.