Some of you may have read about how regulator Sebi has come out with directives on recategorisation of mutual fund schemes. In effect, Sebi has asked fund houses to categorise their existing and new equity schemes under a limited set of categories. This means there will be only one fund in each category. No two-timing allowed henceforth. For many investors, the new categorisation is akin to a love marriage getting transformed into an arranged one. Read on to know why.
At first sight
Love marriage is one where the individuals love each other and get married. For many new-age MF investors, buying a fund was a similar experience. Too modern for an advisor who will 'advice' or heavily into the do-it-yourself mentality, such investors often trusted their gut and vouched for their choice. "It's my call and I will live with the consequences" is a common line. They read about their darling fund in newspapers, magazines or heard about it on T.V.
Humans fall for beauty, but MF investors love returns, especially those logged in the preceding year. Having selected their fund, such investors immediately bought the fund, often like a love-struck teenager. How did those 'love marriages' perform? Well, we will get to that in detail some other day. It is, however, safe to say that love marriages between funds and investors, quite like the real weddings, take time to evolve. In the short-term, they may have thrown up some nasty surprises but if the investor stuck on then it did work (mostly) unless they married a horrible fund!
All along, friends, relatives and parents watched on silently. They were waiting in the wings, as some would like to put it.
Love but arranged
In the Indian context, an arranged marriage is where individuals marry after meeting at the behest of their dutiful parents. It is the traditional way of marrying in this part of the world, where parents' wish is like the word of God. But when two individuals have a love marriage, they cannot get hitched in an arranged way. But thanks to Sebi, your mutual fund love marriage is set to become an arranged one.
In the love marriage, the investor falls in love with the fund and buys them. But in a love marriage turned arranged, the investor buys a fund on their own and later discovers that the fund has changed dramatically. Married individuals will acknowledge that husbands and wives often 'change' after marriage too, but what is happening in the world MF is total transformation. This is happening because Sebi wants a clear categorisation of funds. While the purpose of such an initiative is truly great, it is difficult not to miss the irony in it.
Without taking specific names, we can tell you that a large cap fund of a very large fund-house is getting merged with a mid & small cap fund with effect from April 28, 2018. Post merger, the new entity will become a multicap fund. There are many such examples where a large cap fund is now becoming a fund that will invest both in large cap and mid cap stocks. Then, there are diversified funds now narrowing their vision to invest only in large cap stocks.
Going by the first example, if an investor bought the large cap fund, he/she would have wanted to stay in a large cap fund. Ditto for the investors in mid & small cap fund. With the merger, investors of both the merged funds are getting into a scheme which was not their choice! But with markets doing well, it is difficult to decide whether to exit. Calling off a fund marriage means foregoing any potential gains that the new fund would give, or tax implications.
The way ahead
Marriages, be it love or arranged, have some fixed outcomes. One of the popular ones is weight-gain by a spouse. If a spouse gains a lot of weight, it can affect the marriage. The same holds true for funds as well.
For instance, most of the investors should worry a lot when some of the midcap or smallcap funds merge. This is because in such a situation the fund manager will have to be very careful. If the merged fund entity becomes big because assets of two funds combine, this will be an impediment to the fund performance.
These are trying times for existing MF investors. A mere name change of a fund is not going to satisfy the regulator, like old days. In the new classification era, a fund has to convince it belongs to its category and have an investment strategy that fits. Think of this as a spouse mending their ways after trouble in the marriage. Many fund houses, much like some spouses, would like to wriggle out of the classification problem, by re-classifying funds or re-stating their strategy.
As an investor, it is now more important to understand the new strategy of your fund. Understanding is what will take you forward, just like it happens in a real marriage!
(The author is a personal finance journalist with over 13 years experience)