Mutual funds: Be careful of benchmark changes

It isn't necessary to shift unless you have a duplicate fund in your portfolio

Last November, when SBI Magnum Global Fund changed its scheme’s benchmark from the S&P NSE Mid-cap Index to the S&P BSE Mid-Small-Cap Index, Value Research, a Delhi-based mutual fund rating agency, revised the scheme’s  rating  from four to three. On the other hand, Sundaram Select Debt Short Term Asset Plan’s change in benchmark — from Crisil Liquid Fund Index to Crisil Short-Term Bond Index — led to an improvement in its rating from two to one. Clearly, when fund houses change their benchmark or even categories, rating agencies take it seriously. So should you. It may not be necessary to exit these funds, but there is a strong reason to re-evaluate the fund and understand the reason behind the change, say experts. “Benchmark changes normally come on the back of change in the index’s composition. The fund manager may feel that the revised composition of the index is not the appropriate one and hence change the benchmark. Another reason is also the market cap, which also keeps changing in line with the market. For instance, at the time of the construction of the fund, the portfolio manager may have decided that the fund will have exposure to mid-cap and large cap to a certain percentage. “Sometimes the indices may undergo a change with a change in markets. For instance, today we are talking about 2 trillion dollar market-cap size. If it increases to 5 trillion dollar market-cap size, then all definitions will also go for a change,’’ says A Balasubramanian, CEO, Birla Sun Life Mutual Fund.

Sometimes, the fund manager may feel that the original mandate is not appropriate for current market conditions. For instance, if a small and mid-cap fund becomes a dedicated small cap product, then the benchmark also changes. “The investment style of the fund manager could change somewhat. As a result, investors who have the fund in their portfolios need to evaluate if it competes with an existing product they already have,” says Kunal Bajaj, CEO, Clearfunds.com, an online mutual fund investment platform. 

Balasubramanian says that a change in mandate or features of the scheme does not mean that it is bad for investors. “As long as the underlying communication about why the fund house is changing its mandate is clear and it is possible to establish that is done in the best interests of the investor, the change is fine. The fund house usually changes its mandate to either to generate higher returns on the portfolio or to ensure sustainability over longer term. Or maybe lack of opportunity in the market and the fund manager needs to look for more opportunity. “If Infrastructure Investment Trust and Real Investment Trusts give 2.5-3 per cent more, then why should one not take that option,” he says

According to Shiv Nandan Negi, Co-founder, MintWalk, an online investment platform, a change in the benchmark for a recently-launched scheme (say less than five years) raises questions on why the fund house is undergoing a frequent rethink on its investing strategy.

According to Roopali Prabhu — Head Investment Products, Sanctum Wealth Management, a substantial shift in strategy has the potential to impact returns. During the bull run in fixed income in the past year, some of the short/medium term debt funds took exposure to G-secs. 

Most investors would have in the preceding period perceived these being accrual funds and therefore relatively lower volatility. But G-secs introduced a potential for greater volatility and possibility of greater drawdown. Sometimes this change in the strategy could be to make the fund more relevant in the prevailing circumstances.

“If the risk profile and the investment horizon changes with the change in fund strategy significantly, an investor needs to review the suitability,” Prabhu adds.