How To Deal With Reclassification Of Funds

How To Deal With Reclassification Of Funds

- Sudipta Mitu

For a long time, market regulator, the Securities and Exchange Board of India (Sebi), had been asking fund houses to reduce the number of funds they have, the purpose being to make it simpler for investors to choose funds. In October 2017, the regulator came out with a circular that reclassified openend funds into five categories and 36 sub-categories. Of the 850 open-end schemes in existence, it was expected that almost 50 schemes would have to be merged as they had similar mandates. In reality, fewer funds have been merged while the rest have been moved into different categories.

Currently, those mergers and change of mandates are happening. Fund houses have started sending out communications to investors in this regard. If any of the schemes that you have invested in has undergone a change, you need to evaluate the change and take suitable action.

After the Sebi circular, one advantage will be that fund managers will have to stick to their mandates. Large-cap funds, for instance, will have to invest the majority of their portfolio holdings in largecap stocks, which have been defined as 1-100 stocks by market capitalisation. In the past, especially during market rallies, fund managers would take large exposures to mid- and small-cap stocks in order to outperform their peers. This will no longer be possible. A foray into mid- and smallcap stocks made a large-cap fund more volatile and risky. Investors putting their money in a large-cap fund may not have wanted such volatility. Also, when all the funds follow a similar investment mandate, as will be the case now, their performance comparison becomes truer. It becomes a more like-to-like comparison.

Barring a few categories, fund houses will be allowed to own only one fund in most categories. Hence, the best fund managers in each fund house will be able to focus their attention on a single fund, or at least a reduced number of funds.