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Mutual Fund Re-Categorisation: Checking Past Performance

The simplicity and ease of investing though mutual funds in the path of wealth creation is a well-known fact. Thanks to Securities and Exchange Board of India (Sebi), it will now become even more simpler than before. The regulator’s move on rationalising and categorising the open-ended mutual fund (MF) schemes will unfold a new era in the mutual funds industry. The steps taken by Sebi will result in MF schemes showing their true colour, thus making retail investors pick the right scheme as per their risk profile.

Mutual Fund

There will be clearly-defined and well-structured 16 new debt fund categories, 10 new equity categories and six hybrid categories of MFs. Making a comparison between schemes within the category will become much easier. Illustratively, if you intent to invest in a large-cap scheme, it will be true-blue large cap scheme and not have large exposure in mid-cap stocks.

Merger Of Schemes

Overall, two major changes are underway. First, some of the schemes of the same fund house are being merged, and second, for a few other schemes, the names are being changed to showcase their true nature. Both these changes may result in definitive and crucial changes in the fundamental attributes of the schemes. Currently, there are several instances in which an investor unknowingly may own schemes that either have similar market-cap or exposure into similar sectors even though the scheme name may suggest otherwise. These two steps will help investors avoid duplication of schemes in their portfolios.

Henceforth, every fund house is going to have a fixed number of schemes in each category. This will make the offerings focused and help investors decide better.

Past performance in MF schemes was never a yardstick to be used to identify future winner schemes. However, long-term consistency of the schemes was always one of the parameters to consider while selecting schemes. A case in point could be this: Post re-categorisation, a large cap fund gets merged with a mid cap fund and becomes a multi-cap equity scheme.

Past Performance Not Much Help

Looking at their individual past performance is obviously a futile exercise. Going forward, change in the attributes of some of the schemes and merger of some schemes will make it difficult to gauge the performance of the schemes in the new avatar even if weighted average returns is shown. Investors will have to wait for a few months or perhaps a few years to make a meaningful comparison of the long-term returns generated by the scheme. It will be premature to take the decision to remain invested or to exit unless all schemes in one’s portfolio have resorted to the changes.

Mutual Fund

The fund houses are sending communication to the investors regarding the changes in the attributes of the schemes. Rather than making any ad-hoc decision, investors should wait for all the fund houses to announce their changes. One should go through the ‘investment objectives’ section in the offer document to get a better idea of what the scheme is about. Also, one should check out its ‘asset allocation pattern’ to know where all, and in what proportion, the scheme plans to invest its money. It should align to your financial needs and help you meet your financial goal.

Long-Term Consequences

Thereafter, have a second look at your mutual fund portfolio. See that there is no duplication and overlaps in your portfolio. There could be more than one multi-cap scheme but to drop one out of your portfolio, wait for their long-term performance.

Mutual Fund

In fact, Sebi’s move may have direct and long-term consequences on your equity fund portfolio. Hence, act accordingly. Asset allocation, market-cap and even sector allocation is going to have an impact on the performance of a scheme. Evaluating them across these factors may not be an easy task for most retail investors. It will be better to get in touch with your distributor and revamp your portfolio. Taking the right action today will go a long way in building wealth over the long term in line with your risk profile.



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