Has Your Mutual Fund Scheme Really Changed?   May 10, 2018


Mutual-fund

The last couple of months have been very eventful for the mutual fund industry. The curiosity as well as confusion has been building up among advisors and mutual fund investors, as mutual fund houses announce the new version of their schemes in order to meet the 'SEBI's Categorization and Rationalization of Mutual Fund Schemes' norms.

The market regulator had directed them to relook at their scheme categorization and realign the schemes and underlying portfolios to the 36 categories, as defined by SEBI.

Though some schemes have undergone a minor changeover and are placed into a new category with minimum impact on the investment style, there are others that have been transformed into a completely new category.

Seeing your inbox filled with communications from fund houses, regarding the changes in the fundamental attributes of the schemes you have invested in, would have probably made you anxious about what to do next.

You may be wondering:

Will my fund no longer be the same?

Will it change completely in terms of investment style and performance?

Will this change derail my financial goals?

Should I go ahead and redeem my investments immediately?

What will be the next best fund I should consider investing in?

And so on…

So should you worry about the changes and act immediately or stay invested in the schemes that you hold in your portfolio?

How should you assess the impact of this change on the fundamentals of your scheme?

Are there any checkpoints you can consider to do this, so that you can assess the potential impact on its investment style?

At PersonalFN, we are doing a 5-level check to understand the impact of this change on the funds future prospect.

  • Check Point 1: Change in Name, Category and Investment Objective

    All the communication/addendum regarding the change as shared by the fund houses, clearly state the new name, category and investment objective that the scheme will adopt.

    Prima facie the change in name and category may look significant, for e.g.

    Many investors consider this change as a decision making point and would plan to exit, thinking that 'Franklin India Prima Plus Fund' would no longer hold a large cap oriented portfolio or 'Mirae Asset Emerging Bluechip Fund' will no longer be a mid-cap biased fund. And there are such changes in many other schemes too.

    Nevertheless, as you dig deeper, you will find this change does not have much impact on the original investment style of the fund, unless the change is a kind of diversified equity fund like the 'SBI Magnum Global Fund' or 'SBI Magnum Equity Fund' switching to a 'Thematic Funds' category despite nearly retaining their name.

  • Check Point 2: Change in Asset Allocation Pattern of the Portfolio

    The revised asset allocation pattern is important to judge the future portfolio strategy and also the future prospect of the fund.

    Consider a case where an equity scheme has undergone a change in fundamental attributes due to following changes in its Asset Allocation…

Existing Asset Allocation New Asset Allocation
Type of Instruments Minimum Allocation Maximum Allocation Minimum Allocation Maximum Allocation
Equity and Equity Realted Instruments 80% 100% 65% 100%
Debt and Money Market Instruments 0% 20% 0% 35%
Units issued by REITs and InvITs  N.A.  N.A. 0% 10%
This table is indicative and used for illustration purpose only.


What do you make out from this change?

Instead of earlier provision where the scheme was mandated to hold equities in the range of 80% to 100%, will now be allowed to reduce its equity allocation to as low as 65%. So if the scheme earlier maintained an average equity allocation of say about 90%, will it change now? Not in our opinion.

The fund manager may still like to maintain similar equity levels if the conditions are optimistic. However the minimum allocation of 65% may act as an enabler, where the scheme will now have the flexibility to reduce its equity allocation to as low as 65%, if the market conditions turn gloomy. Moreover, the impact of upto 10% allocation to units issued by REITs and InvITs can be judged only after closely watching the level of such holding in the portfolio.

Now take a case where a Debt-Oriented Hybrid Fund is being converted into a Multi-Asset Fund which results in change in its fundamental attributes.

The change in Asset Allocation will look something like this…

  Existing Asset Allocation New Asset Allocation
Type of Instruments Minimum Allocation Maximum Allocation Minimum Allocation Maximum Allocation
Equity and Equity Realted Instruments 5% 20% 10% 80%
Debt and Money Market Instruments 80% 95% 10% 80%
Gold  N.A.  N.A. 10% 80%
Units issued by REITs and InvITs  N.A.  N.A. 0% 10%
This table is indicative and used for illustration purpose only.


Here the funds equity limit has increased drastically from 20% to 80%, while the lower limit of debt instruments has reduced significantly from 80 % to 10%. Moreover, it has now introduced provision to hold atleast 10% in Gold and 10% in units of REITs and InvITs.

In this case, the fund will have to follow a completely different mandate. And so it deserves to be exited if the investor is not comfortable with the proposed asset allocation for the fund.

  • Check Point 3: Change in Market Cap Allocation

    This is an important checkpoint to consider the kind of risk your fund is expected to take.

    If the change in categorization is such that the fund will now have to focus on a different market cap as defined under SEBI Categorization norms (e.g. a pure large cap fund converting into a Large & Midcap Fund; or a Midcap fund becoming a large cap fund). In such cases, the proposed categorization may change the risk level of the fund. A conservative investor who prefers investing in a large cap fund may not be comfortable moving to a mid-cap fund. Similarly, an aggressive investor who invested in a mid-cap fund to generate high returns at higher risk may not want to be invested in a fund which changes its mandate to large caps.

    Before you plan to exit your fund, it will be prudent to judge the market cap allocation suggested under each category of funds.

Category Large Cap Stocks Mid Cap Stocks Small Cap Stocks
Large Cap Fund 80% to 100% 0% to 20% 0% to 20%
Large & Mid Cap Fund 35% to 65% 35% to 65% --
Mid Cap Fund 0% to 35% 65% to 100% 0% to 35%
Small Cap Fund 0% to 35% 0% to 35% 65% to 100%
Multi Cap Fund 65% to 100% across large cap, mid cap, small cap stocks
Source: SEBI, PersonalFN Research

Large caps: First 100 companies on full market capitalisation basis

Mid caps: All companies from 101st to 250th on full market capitalisation basis

Small caps: 251st company onwards on full market capitalisation basis

While there are restrictions on minimum allocation the funds in the large cap, large & mid cap, mid cap and small cap categories, the funds qualifying under multicap category has no such restriction and can be flexible in holding any proportion across market cap. The only condition is to hold exposure across market caps. 

So coming back to our previous example…

  • The Large Cap oriented 'Franklin India Prima Plus Fund' after being renamed as 'Franklin India Equity Fund' and classified under 'Multi cap Funds' category, needs to hold exposure across market caps. Therefore, it can still maintain the present market cap allocation by holding predominant exposure into large caps, along with significant diversification into mid and small cap stocks.

  • The mid-cap biased 'Mirae Asset Emerging Bluechip Fund' being classified under 'Large & Mid Cap Funds' category, will now have to hold a minimum 35% into large caps, while it can still maintain predominant allocation of upto 35% to 65% into midcaps and nearly follow its current investment style.

Investors in such funds should not worry much. They can patiently hold onto their investment in and keeping a close watch on the market cap allocation. In case the fund deviates significantly and switches to market cap they are not comfortable with, they can bid the fund goodbye.

  • Check Point 4: Expected change in Investment Style and Strategy

    Evaluating the investment style and strategy to be followed by the fund is necessary to not only judge the money-making potential of the fund, but also to understand its suitability for you as an investor. And we are following it closely, as we validate and update our views on the funds.

    Here is the expected investment style and strategy to be followed by other equity and hybrid categories…

Category Expected Investment Style / Strategy
Dividend Yield Fund Will predominantly invest in dividend yielding stocks and hold a minimum 65% investment in equities.
Value/Contra Fund Will follow a value / contrarian investment strategy and maintain minimum 65% investment in equity & equity related instruments.
Focused Fund Will focus on the number of stocks (maximum 30), and invest a minimum 65% of its assets in equity & equity related instruments.
Sectoral/Thematic Fund The investment in equity & equity related instruments of a particular sector/particular theme should be minimum 80% of total assets.
Conservative hybrid Equity & equity related instruments: 10% to 25% of total assets

Debt instruments: 75% to 90% of total assets
Balanced hybrid/ Aggressive hybrid Balanced hybrid will invest 40% to 60% of total assets in equities and 40% to 60% in debt instruments.

No Arbitrage would be permitted in this scheme.
Aggressive hybrid will invest 65% to 80% of total assets in equities and 20% to 35% in debt instruments.
Dynamic asset allocation or balanced advantage Allocation to equity and debt will be managed dynamically. So it can hold 0 to 100% in equity or 0% to 100% in debt.
Multi-asset allocation Will invest in at least three asset classes with a minimum allocation of atleast 10% each in all three asset classes.
Arbitrage Will follow arbitrage strategy and invest minimum 65% of its total assets in equity & equity related instruments.
Equity savings. Will invest minimum 65% in equity & equity related instruments and a minimum 10% in debt instruments.
Source: SEBI, PersonalFN Research


If the fund is about to significantly change its investment style and strategy going forward, then it may not be a good sign. Say a diversified equity fund, transforming itself into a thematic or sector fund may be a sign to quit the fund, if you are not comfortable with the proposed sector or theme.

The major change in categorization and investment style has been seen among debt funds, which has left many investors wondering what they should do next.

Let us quickly look at the expected investment strategy under each debt category.

Category Expected Investment Style / Strategy
Overnight Fund Investment in overnight securities having maturity of 1 day.
Liquid Fund Will invest in debt and money market securities with maturity of upto 91 days only.
Ultra-short duration Fund Investment will be in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months to 6 months.
Low duration Fund Investment will be in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months to 12 months.
Money market Fund Will invest in Money Market instruments having maturity of upto 1 year.
Short duration Fund Investment will be in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year to 3 years.
Medium duration Fund Investment will be in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 year to 4 years.
Medium to Long Duration Fund Investment will be in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 year to 7 years.
Long Duration Fund Investment will be in Debt & Money Market instruments such that the Macaulay duration of the portfolio is greater than 7 years.
Dynamic Bond Fund The scheme can invest across duration.
Corporate Bond Fund Will invest minimum 80% of its assets in corporate bonds (only in highest rated instruments).
Credit Risk Fund Will invest minimum 65% of its total assets in corporate bonds (below highest rated instruments). i.e. investment will be predominantly in AA and below rated instruments.
Banking and PSU Fund Minimum 80% investment will be in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions.
Gilt Fund Will invest a minimum 80% of its assets Gsecs (across maturities).
Gilt Fund with 10-year constant duration Minimum 80% investment will be in Gsecs, such that the Macaulay duration of the portfolio is equal to 10 years.
Floater Fund Will invest minimum 65% of total assets in floating rate instruments.
Source: SEBI, PersonalFN Research


As can be seen, there is a very thin line drawn between categories of debt fund and they now have well-defined objective.

Even though you were until now investing only in liquid fund or short term debt fund or long term bond fund for that matter. Now onwards, you will be having more options to choose from, depending on your objective and preference.

You may find the liquid fund you invested in, is now classified under overnight fund. Your Ultra-short Term Debt Fund may now have slipped under Money Market Fund or Low Duration Fund, depending on the duration it plans to hold. Your Short Term Debt Fund is not a Short Duration Fund anymore, but has been classified under Corporate Bond Fund or Credit Risk Fund.

So do you need to sell them immediately?

In our opinion, instead of rushing into dumping your debt fund, it is important to analyse the investment style and duration it is expected to follow. Evaluate the kind of instrument it is expected to hold in the portfolio and how different will it be from the ones in the present portfolio.

Take the case of 'HDFC Regular Savings Fund' (erstwhile HDFC Short Term Plan), which is now being merged with HDFC Corporate Debt Opportunities Fund and the resulting fund will be called 'HDFC Credit Risk Debt Fund' that will invest minimum 65% of its total assets in corporate bonds (below highest rated instruments). i.e. investment will be predominantly in AA and below rated instruments.

If you check the credit quality of the past portfolio of HDFC Regular Savings Fund, it usually holds about 60%-70% of its assets in AA and below rated instruments. Therefore, there does not seem to be much impact on its credit quality. However, the kind of duration the fund will hold is not defined. So investors willing to take higher credit risk for higher yield may still hold their investment in the fund, keeping a close watch on its duration that should not breach their comfort zone.

Similar is the case with 'Aditya Birla SunLife Short Term Fund', which is to be renamed as 'Aditya Birla SunLife Corporate Bond Fund' and classified under Corporate Bond Funds expected to hold a minimum 80% of its assets in corporate bonds (only in highest rated instruments).

Even though Aditya Birla SunLife Corporate Bond Fund seems completely different from Aditya Birla SunLife Short Term Plan, the past holdings of the fund's portfolio reveals that it usually holds about 75% to 90% of its assets in AAA rated corporate bond instruments. Therefore, nothing much is going to change for the fund except its name and categorization. However, the kind of duration the fund will hold is not defined. So investors willing to hold exposure in highest rate corporate bonds may hold on their investment in the fund, keeping a close watch on its duration. In this case too, the fund's portfolio maturity and duration should be within your comfort zone.

However, if your debt fund has moved from a longer duration fund to a money market fund, or if your Gilt Fund is transformed into a Corporate Bond Fund, it may not meet your investment objective and hence, could be exited. For e.g.: The HDFC Floating Rate Income Fund - Long Term Plan and HDFC Gilt Fund - Short Term Plan will be merged into HDFC Medium Term Opportunities Fund and the resulting fund will be known as HDFC Corporate Bond Fund that will invest in AAA rated Corporate Bond instruments.

  • Check Point 5: Change in Product Labelling, Risk Profile and Benchmark

    Mutual Funds label their schemes to enable investors understand the risk level of the product and its compatibility with their specific goals. Here the funds are labelled as Low Risk, Moderately Low Risk, Moderate Risk, Moderately High Risk and High Risk.

    Product Labelling may state that, 'Investors understand that their principal will be at Moderately Low risk'. This means the product is suitable for investors having 'Moderately Low' risk appetite and willing to take that kind of risk. If your scheme's risk profile increases a little, there is no reason to panic, but if the categorization results in the product labelling being changed from Moderately Low Risk to Moderately High Risk or High Risk, then it will be a trigger to reconsider your investment.

Indicative Risk Return Matrix – Equity & Debt Categories

Source: PersonalFN Research


Similarly, evaluating the benchmark could also be an important parameter. If the fund house decides to switch the benchmark of the scheme from Nifty 50 to Nifty 500 or from S&P BSE 100 to S&P BSE Midcap then it should raise a question about the risk it is about to take going forward to deliver returns that are more aggressive.

These are the five important Check Points we are following to evaluate if the schemes have changed their strategies substantially, in order to ensure that they are still suitable to meet the financial goals and objective of the investors.

If you as an investor are not comfortable with the proposed changes in your schemes, you may consider exiting without paying an exit load.

However, do keep in mind the tax implication you may have as you sell your units.

  • If, you choose to withdraw your units within a period of 1 year (for equity funds) and 3 years (for non-equity fund), you may have to pay Short Term Capital Gains Tax @ 15%
  • If your holding period is more than 1 year (for equity funds) and more than 3 years (for non-equity fund), you will have to bear Long Term Capital Gains Tax.
  • For schemes that are merged with another or cease to exist, there will be no tax implications.


If the change is limited only to the name of your scheme, while the broader category and market cap allocation is expected to remain broadly the same, then there is not much to worry. You can simply stay invested and may even continue with your SIP investment in the scheme.

However, if your scheme is merged or there is a substantial change in its category, you may need to relook at your investment strategy and figure out whether the new scheme in its new version fits into your objective and your investment plan.

If it's new style deviates a lot from your objective and risk appetite, then it will be prudent for you to use the free exit load period to move out of the scheme.

If you are confused about you mutual investment strategy due to these changes, do contact your mutual fund advisor or investment consultant to help you understand the ramifications of the scheme changes and decide on the holdings in your mutual portfolio.

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