Mutual Fund Unlocked: What is Style Drift?

At inception every fund has a set objective or specific style of investing, which is determined and decided by the asset management company (AMC) of that fund. Divergence of the fund from its investment style is known as the style drift. This can be a response to capital appreciation as well as change in fund’s management. So simply style drift can be referred to any investment by fund manager outside its stated investment objective.

The new categorisation and reclassification norms by SEBI have given a clear criterion of investment for various categories which suggest the investment proportion of equity and debt component as well as within equity component, the exposure to the various market caps, such as large-cap, small-cap and mid-cap. However, the remaining portion can be invested in other asset classes or securities by the fund managers as per the scheme's nature. If a fund manager deliberately modifies the investment style for short-term returns, it can change the overall risk return profile of a client's portfolio where he can be gaining in terms of short term returns and while long-term returns may be hampered.

Sometimes, Style drift may increase returns but at the same time, the risk exposure will be changed for the investor. So, investor should periodically look at the investment strategy and style to ensure his financial goal and risk exposures remain aligned. This can be done in a simple way by checking the significant shift in sector weighting of scheme and correlation of a fund’s performance with a stated style. With this kind of due diligence, investors can protect their investment and returns with respect to their risk appetite.