Review your portfolio when funds change

If a scheme deviates too far from its mandate, look for an alternative

A change in a mutual fund (MF) scheme can affect your investment portfolio. Sample this: The fund manager of one of the biggest equity funds by assets under management (AUM) decided to focus on select large-cap stocks. Earlier, the majority of the stocks were mid- and small-caps. The number of stocks came down from around 63 to 40. In the past two years, the fund has started underperforming its peers.

There have also been several instances of fund managers adding a significant portion of mid- and small-cap stocks in a large-cap scheme and vice versa. “Most funds don’t have a specific mandate. They have the leeway to change a few things, as the scheme information document is broad. Only if a fund is changing the benchmark or two schemes are being merged do fund houses inform the investors and give them an offer to opt out without exit loads,” says Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser India.

According to investment advisors and analysts, the recent changes are primarily due to sharp inflow, markets touching new peaks, certain categories becoming popular or due to change of fund manager. 

When to opt out: Every scheme you add to the portfolio should be done with a particular objective. You could have two-three large-cap funds at the core of the portfolio, two mid- and small-caps or a micro-cap fund. A few mature investors who understand risks might also have one or two thematic or sector funds.

If the fund manager of one of your large-cap funds takes the proportion of mid-caps beyond 25 per cent of the fund’s portfolio, you need to re-evaluate your investment in the scheme. “Evaluate if the fund manager is chasing returns by buying more into mid-cap stocks or is it because the value of the mid-cap holding has surged,” says Kunal Bajaj, chief executive officer and co-founder, Clearfunds.com. Similarly, if a conservative investor has invested in a short-term debt fund but the fund manager starts adding structured corporate papers, the investor needs to look at an alternative scheme.

There are times when the benchmark of the fund might change but the investment style and its attributes remain the same. In that case, investors may continue to remain in it. According to the recent S&P Indices Versus Active Funds (SPIVA) India Scorecard, in the past 10 years, only 30.63 per cent of large-cap equity funds and 28.6 per cent of mid- and small-cap funds did not change their investment style. Only equity-linked savings schemes maintained 100 per cent style consistency. An investor needs to evaluate changes on a case-to-case basis and see how it affects his portfolio. Here are some changes that have been observed in the recent past that may require investors to   take a call:

Change in benchmark: MF schemes could change the benchmark index that aligns with their portfolio. ICICI Prudential Value Discovery, for example, changed its benchmark index from Nifty Free Float Midcap 100 Index to S&P BSE 500 Index, to better reflect its flexi-cap stance in 2015. Birla Sun Life Advantage and SBI Magnum Multicap have also done this. “If a benchmark change does not lead to change in the fund investment style, investors should not worry. IDFC Equity Fund, for example, changed its benchmark index from Nifty 50 to S&P BSE 100. The portfolio continues to be predominantly large-cap stocks,” says Nikhil Banerjee, co-founder, Mintwalk, a Securities and Exchange Board of India (Sebi)-registered investment advisor. 

Changes in attributes, mergers: When a fund house has similar schemes in its bouquet or funds that have low AUMs, they either change the scheme attributes or merge it with a bigger scheme. Attributes can also be changed because the fund house wants a presence in a new category that has become popular. After HDFC Mutual fund acquired Morgan Stanley’s MF business in the country, the fund house inherited similar schemes in its stable. It, therefore, changed HDFC Small and Midcap to HDFC Small Cap, with a higher focus on small-cap stocks.

But, many times in such cases, the investment mandate could change entirely. In March, Tata Treasury Manager was changed to Tata Corporate Bond. Earlier, it predominantly invested in debt and money market instruments with maturity up to one year. Now, it invests in corporate debt securities across maturities. For a conservative investor, the changes make the fund riskier. The best step to take in such a situation is to look for an alternative fund that suits your profile.

Changes due to rising AUM: As the assets of funds grow, so do the number of stock in its portfolio. You will, therefore, find many mid- and small-cap funds have increased exposure to large-cap stocks, as fund inflows have risen in the past three years. In the past four years, DSP BlackRock Micro Cap’s AUM has grown 16 times to Rs 5,975. “The fund started diversifying by adding more stocks when it reached assets of around Rs 3,500 crore,” says Vinit Sambre, senior vice-president, DSP BlackRock Investment Managers. At Rs 5,975 crore, the fund holds 87 stocks.

But, even large-cap funds need to add more stocks, as AUM rises to give portfolio stability and generate better returns. “As the assets in a fund rise, the fund manager has to spread his bets to protect the downside. It also gives him comfort to invest a small portion in mid- and small-cap stocks to generate alpha,” says Banerjee.