Who moved my scheme?

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By Investment Advisory Services

Discipline, simplification, customer centricity, common good…. one can call it by any name, but SEBI’s new scheme categorisation exercise will keep investors as well as advisors indecisive at least for some time. There will be name and/or attribute change happening to at least one out of every five scheme in the mutual fund market. Investors will suddenly find their favourite fund names disappearing, or the attribute of their scheme changing which sometimes might not be in line with their investment objective or risk appetite.

“They said it’s a large cap fund. Later they said its predominantly large cap. That is when I saw around 40% mid and small cap exposure…Huuhhh…and that fund manager always kept my blood pressure levels high” sighed Mr.Sinha. Now that SEBI has decided to put it in black and white as to how a fund should define its name as well as portfolio, investors will have less trouble to choose schemes. Also the number of schemes will be cut down to accommodate only one scheme per category per AMC. I.e. Large cap category will have only one scheme in an asset management company. If there are more than one scheme currently, they will either merge or will wear the suit of some other category. Nomenclature also would become clear as to what the objective of the scheme is.

Advantages

Advantages encompass both investor and advisor. If clarity and simplicity is the good news for investor, easier comparison, analysis and portfolio construction are reserved for advisors.

  • The first and most appreciated advantage is the downsizing of schemes. Equally helpful is the decision to sync the name of the scheme with its portfolio composition. For example, a large cap fund will have at least 80% of its portfolio in top 100 companies.
  • Misleading adjectives like opportunities, prudence etc. are cautioned by SEBI and has urged AMCs to do away with such words.
  • The portfolio allocation in a specific category has been clearly defined with concrete percentages. This will make sure that the risk inherent in the scheme remains in expected range.
  • The anxiety Mr. Sinha had will not be felt in future. The only equity scheme with freedom of cap wise allocation for the fund manager is multi cap scheme where the only condition is to have 65% of the portfolio in equity.
  • Solution oriented schemes are given a separate category. This category currently has very less schemes and we could see more AMCs coming up with their own life goal related schemes.
  • An AMC will have only one scheme in a category. This will help in removing ambiguity of fund choice.
  • Benchmarking becomes more meaningful. There is a general practice of choosing conservative benchmarks to beat it ‘consistently’ and stay ahead of competing schemes. Now each category can have common benchmark.

Challenges

You heard it right. There are no disadvantages anyway. They are just short term challenges in terms of portfolio restructuring exercise that has to be done by investors in consultation with their advisor. But need not hurry. It will take handsome time for the whole scheme jiggling process to get over. Fund houses have asked time till June this year to complete their scheme rearrangement exercise.

Investors could see their favourite schemes been chucked away one fine morning and taking a new name and/or attribute. We have to live with it. There is a lot that an investor has to keep notice of in coming days. Investors and advisors need to work together in realigning personal portfolios to ensure that overall objective of the portfolio stays on track.

Things to do

  1. Check for the overall market cap wise allocation of your portfolio after the entire scheme categorisation exercise is over.
  2. If your scheme gets more skewed towards any sector, stock, or market cap, the same need to be addressed.
  3. There might be short term selling and buying of stocks to reach the desired allocation. One cannot say which stock would be bought and which one will be sold. One need to keep a cool head, recline and rest until the dust settles.
  4. Keep a statement of your existing portfolio of schemes and later when the changes come into play, compare the portfolios of old and new scheme and learn the differences. Save both the statements in your investment folder.
  5. In debt schemes, have a look at the portfolio maturity, rating profile and other risk factors to ascertain the risk reward proposition is in desired limits.

Major categories now are Equity schemes, Debt schemes, Hybrid schemes, Solution Oriented schemes and other schemes. Sub categories are defined under each major category. Equity now hosts 10 categories of schemes with a new category called large and midcap.Debt has 16 categories and hybrid has 6 categories. Solution oriented schemes comprise of retirement and child plans. There is a miscellaneous category which includes the left out names like FOFs, Index funds, ETFs, Overseas schemes etc. To have a look at the circular and category list, please visit SEBI website or follow this link. https://www.sebi.gov.in/legal/circulars/dec-2017/categorization-and-rationalization-of-mutual-fund-schemes_36804.html

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