Choosing Mutual Funds

It’s been a long 25 years since the private sector mutual funds started operations in the country and it’s been a journey which has evolved with time. Today, some of those early ventures no more exist in the same fashion thanks to mergers and acquisitions over this period. The whole mutual fund business has been one of change in this period and from products that had little to choose, they have emerged to offer a choice to investors to select a scheme that meets their needs. So much has the influence of mutual funds grown in recent years that it is now among the most preferred investment avenue for scores of Indians. In all this growth, the industry has also faced criticism over too many products for the common man to choose from. At some point, more than 2000 schemes were available from over 40 asset management companies (AMCs). Mutual fund schemes with almost similar investment themes, names and sometimes the same fund manager existed to create difficulty among investors to choose a fund to invest in. Taking note of this complicated functioning, the market regulator SEBI came up with a cir cular last year to ensure that schemes named differently are clearly distinct in aspects like asset allocation and investment strategy among other traits.

SEBI wanted to bring uniformity within the characteristics of similar schemes to make sure investors could evaluate various options before making any investment decisions. So, in the past few months every since the new nomenclature and categorisation was announced, fund houses have been fast to make changes to their offerings to merge schemes where necessary to fall into the SEBI given categories of funds. The categorisation is effective for all equity, debt and hybrid schemes making it uniform across AMCs for easy understanding of investors.

Investor gains

The change is thoroughly aimed to convenience investors, with five main categories – equity schemes, debt schemes, hybrid schemes, solutionoriented schemes and others, which are outside the purview of the first four and sub-categories within for a total of 36 different categories of mutual funds. The new categorisation has already de-cluttered the fund offerings across AMCs and made fund nomenclature easy to understand for investor’s benefit. With this change, investors will have a better grasp and understanding of what they’re investing in. The change is also beneficial for AMCs which will now have limited number of offerings and well-defined investment mandates, doing away with duplicity of fund offerings due to past mergers.

The changes in the fund offerings has been an on-going process over the past few months even as the 41AMC review their schemes to fit their existing offerings to the available categories by merging overlapping schemes into a single one and explore options to launch more schemes where they see an opportunity. Some of the changes in names and scheme types are cosmetic, but in case of some others it is drastic and needs the intervention of investors, who need to decide on continuing their investments in such schemes or exiting them altogether. For instance, in case of Mirae Asset India Opportunities Fund, the new name of the fund is Mirae Asset India Equity Fund and it is no categorised as a multi-cap scheme. Likewise, Franklin India Prima Plus also falls in the same basket, and has been rebranded as Franklin India Equity. That is not the case for some other funds such as SBI Emerging Businesses, which is now SBI Focused Equity. It is the same for Franklin India High Growth Companies, which is now Franklin India Focused Equity and HDFC Core and Satellite, which is now HDFC Focused 30.

All these funds have been reclassified as focused funds. However, it must be noted that these funds, always had a highly concentrated portfolio, which it will continue to do so after the change in name as well. Interestingly, in case of Axis Equity Fund, the name has been changed to Axis Bluechip Fund to underscore its positioning as a large-cap fund, which is also the case for HDFC Balanced Fund, which is now known as HDFC Hybrid Equity, which better reflects its equity orientation in the hybrid fund category.

Evaluation of funds

The change does impact your investments, considering the future of some of these schemes, especially those where the fundamental attribute of the holdings have changed. Take a look at your investments and then the change in attribute of the funds such as the new category, new asset-allocation pattern, and change to the benchmark and fund’s investment objectives. Any change to these attributes, and you should check if holding the fund makes any sense for you or move to a fund that meets your investment needs based on the necessary attributes. Even if schemes have merged, it should be a reason to evaluate the change.

Monitoring fund performance takes a new definition now as many funds will no more have a clear history of performance to rely on. As investment strategy changes or the objective of the fund, it is in your interest to monitor the performance and decide on an action o stay invested in the fund scheme or make a change to a new fund, which is more in sync with your investment need.

The universe of debt funds had a different type of complication prior to categorisation, especially considering the inherent complex structure of these funds. For instance, some short-term funds would invest only in AAA bonds while another would take on considerable credit risks. Moreover, loose category definitions made scheme comparisons almost impossible and it was common for funds to change their orientation with changing economic and policy changes, without mentioning the same to investors. The change in the categorisation of these funds is likely to bring in greater changes than the equity category, despite the greater number of sub-categories.

Similarly, the days of vague investment objectives and confusing investment themes in the name of uniqueness or differentiation will be a thing of past. In its effort to ensure fund schemes delivered what they promised, SEBI has laid down precise definitions of what constitutes each fund type right from defining market capitalisation in case of equity-oriented schemes to duration, type of investment and duration in case of debt funds. A further step is being taken considering the dynamic nature of stock markets by the regulator to publish a list of approved large-, mid- and small-cap every six months through the industry body AMFI.

Effectively, fund managers will have a clear level-playing field as they will have to pick their stocks only from a defined universe and follow an investment strategy which has been laid out to them with the categorisation.

In the debt category, schemes have to adhere to specific duration limits to label themselves as low, short, medium or long duration.

Killing competition

With little to differentiate in objectives in fund schemes, fund manager’s style and experience will come in handy to showcase performance. However, the scenario also does away with any unique proposition to generate returns among funds, making it tough for fund managers to outperform each other significantly. Another aspect that comes into play is the past performance of the funds and ratings, which may not matter anymore as it did in the past. If not for all funds, at least for some the past performance will no more matter as much as it was a talking point. The reason why past performance and ratings do not impact much now because change in category or investment strategy renders past performance based on a different category and strategy no more a recipe for a winning fund performance. After all, a change in strategy or category cannot expect to have the same past performance which was achieved under different conditions. The scenario is somewhat akin to how the top slot cricketing nation is different for test, one days and T20s, with very little common in the formats of the same game. A lot of funds were recommended based on past performance and comparisons were drawn on the long history of many of them. With most of the funds starting anew, it will be some time before performance history can be used as a factor to suggest investments in a fund. At least for the next 3-5 yeas ratings and history will not be an important factor to choose a fund to invest in. As investors you should be careful about this aspect and not be taken by sales pitches rattled by distributors on a fund being superior to another based on past performance, when past is no more as critical as it used to be.

Investor action

But remember that just because a mutual fund scheme is changing to adjust to the new SEBI-proposed amendments, doesn’t mean that it should be thrown out of your portfolio. As long term investors, you must remain calm and have a relook at the funds in line with your financial goals. If the fund you have invested in still fits into the suitability criteria, then there is no need to make unnecessary changes. Do not be in a hurry to exit and enter funds at this stage. More so just on basis of returns or change in fund attributes.

At the same time it is critical that you relook at your investments and closely follow how they fare over the next few quarters before making any changes to them. The ability of fund managers to generate returns will be limited with the defined scope of investment that they now need to follow, which could pose restrictions to the way they have been investing so far. The word of caution is equally important for new investors who are just about planning to invest over the next few years.

Mutual funds are still among the best investment option for small investors compared to other available financial products. However, the times are interesting to track the way fund performances change and investors will need to take risk inadvertently because if they stick to a fund which has changed its orientation has changed, it is a risk and if they exit to another fund, which does not have significant history, it is equally risky. The SEBI move is good for investors in a larger sense with standardisation working for the benefit of investors in the long run. A passing shot – mutual fund investments are subject to market risks, read all scheme related documents carefully takes utmost importance now because you will need to read the documents carefully to know what is in store for your investments.

(A marketing initiative by Open Avenues)

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