New mutual fund categories: What you should do in the evolving scenario

Some of the funds have undergone a change in the name to better convey the new mandate. To be noted, this per se does not mean the fund mandate has changed. It may be to fit into the new fund name framework of SEBI, while the earlier fund management mandate continues. In some cases, where an AMC has more than one fund with a similar description, it has to either merge one with the other or fit it into another category with a different mandate. However, those cases are few and far between. For most funds, it is either continuation of the same fund name with a similar but more well-defined mandate, or a small change in the name of the fund and mandate.

What should you do?

You don’t need to react to everything. As per rules, the AMC has to provide a one-month exit window to investors, in case the investor does not agree with the changes. While you can exit a fund anytime, the significance of the exit window is that if there is an exit load it will be waived in this period. For close-ended funds, when there is complete takeover of business i.e. merger/takeover of an AMC, the exit window is applicable. However, in the current context of scheme rationalization, it is not applicable to close ended funds. Normally an AMC cannot redeem close-ended funds, it can be done only in the extreme event of change of the AMC itself.

When you get a notice from the AMC informing you about the exit window, it does not per se mean that your fund mandate has changed drastically and there is a compulsion to exit. The AMC is bound to send you the notice as per rules. What you have to consider is:

• If the fund continues with the same name with a similar but more well-defined mandate, it is better for you and you should stay put. This is assuming you were ok with the earlier mandate;
• If the fund is undergoing a change of name with a marginally different mandate, you consider it, but there is no compelling reason to exit. Even earlier, when the mandate was not so tightly defined, the fund could have adopted the ‘other’ mandate, subject to what is mentioned in the SID;
• If the fund is being repositioned with a change of name and mandate, you give it a closer and detailed thought, but even here there is no compulsion to exit. What is relevant is, what the new fund management mandate is and whether you are agreeable to it.

Tracking performance

When the change is minor, you can track with the disclosed NAVs. There is a SEBI Circular dated 12 April ’18 that if two schemes with similar features get merged, and the features are maintained, the weighted average performance of the two schemes will be disclosed by the AMC. Where one fund (A) gets merged into another (B) and the features of the other fund (B) is carried forward, the performance of B will be disclosed. There is no action point required from you here, it is about your awareness.

Conclusion

Ultimately it is about allocation of your money to the various investment categories i.e. equity, debt and alternates. Through mutual funds, you anyway have to allocate to equity and debt, through multiple funds. When the funds are undergoing rationalization with a broadly similar mandate, what is required of you is awareness and review of what is happening. You should exit a fund and re-allocate only when there is a sustained underperformance or a drastic change, called change in fundamental attribute, if it does not suit you.

Joydeep Sen in founder of wiseinvestor.in