Over the past month or so, seemingly savvy mutual fund investors have been flooded with constant communiques from fund houses, informing them of changes or mergers in their schemes. The confusion is thanks to SEBI’s circular issued last year that seeks to standardise schemes across fund houses.

For the past six months, fund houses have been busy re-jigging their schemes, to conform to the regulator’s new norms. The ball has now been lobbed into the investors’ court, who are left to decode the elaborate and complex shake-up in mutual fund schemes.

Running over some of the schemes of top fund houses suggests that the nightmare has just begun for investors. They have to pore over numerous mandates to understand the changes; in some cases, sweeping changes in mandates and portfolio have made past performance patchy or irrelevant.

In certain other cases, the adhoc manner in which the fund houses have gone about merging schemes, or making drastic changes in the character of the fund, is bound to leave investors flummoxed. It may be too late to debate on the rationale of the SEBI’s move but the regulator cannot wash its hands off the entire clean-up exercise. As fund houses cut-to-fit their schemes to suit their needs, the SEBI needs to ensure that investors’ interest is not compromised. To be fair, there is some merit in SEBI’s decision to streamline mutual fund schemes. The 42-odd fund houses offering nearly 1,000 different schemes (open-ended), with often overlapping mandates, has made fund-picking a herculean task for investors. Wide deviations from the stated mandates — often loosely defined — have only added to investors’ woes.

So, on the face of it, the SEBI’s diktat that allows only five category of funds — equity, debt, hybrid, solution-oriented and index and fund of funds, and within that only a pre-decided type of schemes, should offer some respite to investors. The SEBI has also gone a step further by laying down the mandates for the schemes. But while the regulator’s mega makeover should have made life simpler for investors, it has created an entirely new set of issues for them to tackle.

The mega unlearning process

To start with, retail investors beginning to buy the ‘mutual fund sahi hai’ plot, have to reboot their understanding of various schemes. Take for instance, HDFC Large Cap that has been investing over 90 per cent in large-cap stocks (defined as per SEBI’s classification). This fund will now become HDFC Growth Fund — a large- and mid-cap fund — which will have to invest at least 35 per cent each in large- and mid-cap stocks. This could peg up the risk of the fund.

By that same order, ICICI Prudential Select Large cap Fund, investing in large-caps constituting the S&P BSE 100 index, will now be ICICI Prudential Focused Equity, investing in up to 30 stocks across market capitalisation — essentially a multi-cap.

Re-adjusting the palate to the new menu of schemes, may get way too complicated when there is a complete makeover. Take the case of HDFC Multiple Yield Fund - Plan 2005. It has been a conservative hybrid fund investing 10-25 per cent in equity and the rest in debt instruments.

It has been an ideal choice for conservative investors, as the fund mainly invests in dividend yield stocks and within debt, adopts an accrual strategy (lower interest rate risk). Morphing into a multi-asset fund, it will now have to invest at least 10 per cent each in equity, debt and gold. Going by the new benchmark the fund has selected (designed to measure the performance of hybrid portfolio having 65 per cent exposure to NIFTY 50 and 35 per cent exposure to NIFTY Composite Debt Index) — it appears that the fund is all set to make a drastic swing towards equity.

Similarly, ICICI Prudential Dynamic fund, a dynamic equity-oriented fund, has now become a multi-asset fund.

Still too many

While the SEBI has restricted the number of schemes to only one within each category, investors still have to deal with the problem of plenty. Going by the SEBI’s pre-set categories, there can still be around 1,600 schemes for investors to choose from. The regulator has allowed more than one scheme in the case of index funds/ETFs, fund of funds, and sector/thematic investing in different sectors. Lack of clarity on how sectors/themes need to be defined, still leaves ample leeway for fund houses to open a pot full of new schemes.

Reliance, for instance, has seven sectoral/thematic schemes, mostly investing in varied sectors. But its Quant Fund (earlier Quant Plus) setting itself apart only based on the method of stock selection appears a forced upon distinction. Reliance Quant Fund, looks like an avatar of a large- or large and mid-cap fund, the only difference being that it would use quantitative methods based on stock price movement and financial/valuation parameters to pick stocks.

Merger matters

There have also been anomalies in the manner in which funds have been merged. Unrelated schemes have been merged to take on the avatar of an altogether new scheme. For instance, HDFC Balanced Fund (investing 65-70 per cent in equities and balance in debt) has merged into HDFC Premier Multi Cap (a multi cap fund with mediocre performance). In case of Reliance, Reliance Focussed Large cap merged into Reliance Mid & Small cap fund to morph into a new fund.

Damage control

In sum the damage has been done. As the regulator, the SEBI now needs to identify core set of issues that need immediate attention. Where the character of a fund has completely changed, the regulator needs to ensure that fund houses rather than using the one-size-fit-all kind of communiques, simplify changes in layman language.

The SEBI may also need to lay down protocol on disclosure of past performance, where a fund has undergone a drastic change in character, besides merger of schemes. To avoid a repeat of past issues like deviation from mandates the regulator will have to go over funds’ portfolios with a fine-tooth comb periodically.

Lastly, investors should be given a one-time tax dispensation on exiting funds that no longer suit their needs. Currently investors, of a scheme where there has been a change in fundamental attributes (including merger) are given an option to exit without the exit load. But given that they have to cough up tax on exit, it could deter a prudent move. After all, hapless investors cannot be left bearing the brunt of SEBI’s diktat, meant to serve their interest in the first place.

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