If you are a mutual fund investor, chances are that you have recently been intimated by your fund house about changes to the scheme that you are investing in. In October 2017, Sebi has directed fund houses to redefine fund categories, and rationalise schemes to make them clearly distinct from each other. Therefore, several schemes have been renamed or merged together, in order to be clearly distinct from each other. This is to help investors identify schemes clearly and to be able to distinguish one scheme from another similarly-themed scheme.
For example, now a large-cap equity mutual fund must invest 80 per cent of its total assets in the top 100 companies by total market capitalisation, departing from earlier practice of large-cap funds taking significant mid-cap exposure for higher gains. Let’s examine what you as an investor need to do.
NOTE THE NEW MANDATE
There are several redefined fund categories now: 10 in equity funds, 16 in debt, and 6 in hybrid. If your scheme has undergone changes, note what the changes are. Download and read the Scheme Information Document (SID) to understand the changes. If in doubt, consult a mutual fund advisor. Some funds may have had a name change, which helps inform investors about its attribute better. For example, HDFC Top 200, which has been a large-cap fund, will be renamed as HDFC Top 100, clearly indicating that it is a large-cap focused fund. Sometimes, the name change may be cosmetic. For example, Mirae Asset India Opportunities Fund will now be renamed to Mirae Asset India Equity Fund, with no changes to the fund's investment style.
DON’T EXIT SCHEME IN HASTE
Whatever your scheme, you must examine how it will change. Has the scheme changed fundamentally in a manner that no longer helps you earn expected returns and meet your investment goals? If not, you can
continue investing in the scheme. In most cases, funds have not been altered fundamentally by Sebi’s guidelines. Therefore, you do not need to take any action. However, you do need to understand the degree of impact caused by the new guidelines. For example, there is a new equity fund category named large and mid-cap. In it, a minimum of 35 per cent of the portfolio needs to be large-cap securities and a minimum of 35 per cent in mid-cap securities. A higher mid-cap exposure poses the possibility of greater risk and therefore greater reward. If your fund has recategorised from a large-cap fund to a large & mid-cap fund, you may want to assess your exposure to higher risk.
USE THE ALLOTTED WINDOW
Once a scheme undergoes the announced changes, its investors are provided a window of three months. In this period, fund houses will provide investors the option to exit the fund or to switch to another fund. In this period, no exit load will be applied. The fund house would have communicated a deadline to you by which you need to share with them your unwillingness to continue with their reclassified scheme.
UNDERSTAND NEW TAX RULES
Apart from these above-mentioned changes, mutual funds will also be taxed differently from this financial year. For equity funds, there is now a new tax on Long Term Capital Gains (LTCG; long term being one year or more). LTCG above Rs 1 lakh will now be taxed at 10 per cent without indexation, surcharge as applicable (10-15 per cent), plus the newly introduced four per cent health and education cess, making the tax effectively 11.44 to 11.96 per cent. Apart from this, the Short Term Capital Gains (short term being one year or less) tax will be 15 per cent plus surcharge plus four per cent health and education cess.
