How to switch, exit mutual fund schemes: Experts explain

Capital market regulator Securities and Exchange Board of India (Sebi) has defined various categories of open-ended mutual funds, with clear and distinct scheme characteristics for equity, debt, hybrid, solution-oriented, and ‘other scheme’ categories. There will be one scheme per category per fund house. This means just a different fancy name will no longer be a differentiator. It brings in uniformity in the characteristics of the similar type of schemes launched.

Asset managers are responding by changing the fundamental attributes of existing schemes, or by merging them to realign their funds to match the Sebi specified mandates. Hence, there is a good chance that a typical pure equity, debt or hybrid fund that you bought a year ago may be evolving into something completely different. Should you exit a fund that has changed, or stay put? DNA Money spoke with experts to get the answers.

Understand changes

Funds are undergoing modifications in their fundamental attributes. This means one or more main characteristics of the scheme being changed. If the nature of the change is small, one can ignore it. For example, some monthly income plan schemes are becoming conservative hybrid schemes.

But if the change being effected is big, then it is time to take a decision. For instance, some hybrid funds are becoming multi-asset funds or multi-asset funds are turning more equity focussed.

“Investors should evaluate whether the new objective and the investment strategy is aligned with their risk profile and requirements and stay or exit based on their assessment,” advises Suresh Sadagopan, founder, Ladder7 Financial Advisories.

For instance, one may have invested in a multi-cap fund with higher exposure to mid-cap stocks, but now the fund needs to restrict the combination of large-cap and mid-cap stocks.

Before you decide you want to exit, an alternative needs to be found. Neil Borate, personal finance analyst, Rupeeiq says: “The investor will have to find an alternative scheme which meets his or her original requirements. For example, if a liquid fund becomes a PSU debt fund, thereby contravening the investor’s original objective, an alternative liquid fund will have to be found. If he or she has invested through a distributor or adviser, now would be the time to approach them.”

If you exit a fund, consider tax implications from Long-Term Capital Gain (LTCG) perspective. “One cannot base one’s decision to stay or exit just based on taxes alone. Currently, one may not be paying LTCG in equity schemes as almost all schemes are below their price on 31/1/2018 ( which was the date of reckoning based on which price to calculate capital gains),” points out Sadagopan.

Merger headaches

Scheme mergers are usually designed to save schemes, or keep them relevant. They need to be understood carefully, before taking a decision. If you have invested in a large-cap based fund, but now the AMC has merged another large-cap fund with it but its portfolio does not match with your idea, you may need to exit the fund.

“Similarly, in the mid-cap space if an existing fund designed as a growth scheme is now getting merged with a value fund (in the mid-cap space) and post-merger it will become value fund, this is completely different from your idea of growth,” points out Suresh Parthasarathy, a Sebi-registered investment advisor.

Scheme mergers are happening three ways.

One, schemes with similar mandates are being merged.

Two, couple of schemes are being merged, with the surviving scheme retaining either parent schemes’ characteristics.

Three, two or more schemes are merging to create a completely new entity. This type of scheme merger is the trickiest one for investors.

Manish Kothari, director & head of mutual funds, Paisabazaar.com says: “For instance, if a risk-averse investor of a large-cap fund finds it merged with a mid-cap fund to form a focused equity fund, he may find the new fund a bit risky for his comfort. In that case, the investor can redeem the new merged fund for a pure large-cap fund.”

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Parthasarathy has an easy formula. If the fund is not in sync with your idea due to change in the categorization, you should move out of the fund or talk to your advisor to understand the change.

Source: DNA Money