Keep An Eye On Categorisation And Rationalisation Of Schemes

Mutual funds offer a variety of schemes that allow investors to invest in different asset classes to build their portfolios for varied investment goals to be achieved over different time periods. However, while selecting the funds, investors often face the dilemma of how to choose the right one and in what proportion. The over-lapping, both in terms of portfolio composition and investment strategies, often makes it difficult for investors to make the right decisions. 

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

Realising the challenges faced by investors in this process, SEBI has asked mutual fuds to categorise and rationalise schemes as per the norms prescribed by it. The objective is to ensure that different schemes managed by mutual funds are clearly distinct in terms of asset allocation and investment strategy. SEBI has categorised mutual fund schemes into five categories, namely, equity, debt, hybrid, solution-oriented and other schemes. Each of these categories has sub-categories and mutual funds are allowed to have only one fund under each of these sub-categories, except in the case of sector, index and fund of funds.

The fund houses are in the process of implementing these guidelines and have already announced the changes. In some cases, there is just a name change, whereas in others there are significant changes in investment strategies and allocation to different segments of the market. Investors must carefully analyze the changes to see how these are going to impact their portfolios. If need be, they must take the help of their advisors to do so. They will do well not to treat these as minor changes as some of them are likely to have a significant impact on their investments, both in terms of potential of returns as well as risk profile. This is also a good opportunity for investors to realign their portfolios as the new categories and sub-categories provide lot more clarity now. 

Investors have an option to exit from a fund if they do not agree with changes proposed by the fund house. This period is clearly mentioned in the communications sent by the fund houses explaining the changes to investors. However, one must consider tax implications of any decision to exit from a scheme. 

Clearly, the new guidelines will make life easier for you as an investor. However, there could be some negative impact on the performance of some sub-categories of funds. For example, the defined universe for mid-cap funds would be 101st to 250th company in terms of market cap. Considering that a major differentiator between funds investing in this important segment of the stock market is stock picking ability of the fund manager, lack of flexibility in term of stock selection is likely to impact the performance. On the other hand, small-cap funds will have a larger universe as all the companies beyond the top 250 companies in terms of market cap will be considered as small-cap stocks. Similarly, for debt funds, while some of the sub-categories clearly define the maturity duration of their portfolios and that will make it easier for you to choose the ones that match your time horizon, in some of the sub-categories of debt funds, the flexibility of the fund managers has been curtailed.

As is evident, the standardisation and rationalisation of the schemes will go a long way in allowing you to choose your options well. Remember, a good start to your investment process lays the foundation of investment success. However, monitoring the progress of the portfolio at regular intervals will remain an important activity so as to ensure that it remains on track at all times. Simply put, it would be prudent to have an investment plan as well as a strategy in place to implement it. Those investors who don’t realize the importance of this process would usually fail to achieve much from their investments. 

This process will ensure that you don’t feel compelled to abandon your longterm investment plan when faced with vagaries of the stock market. Remember, ad hoc decisions can seriously dent your chances of creating sufficient corpus for some of your critical goals such as children’s education and retirement planning.