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FundsIndia Explains: Change in fundamental attributes of a fund

March 5, 2018 . Mutual Fund Research Desk

SEBI’s mandate to categorise funds into specific buckets has resulted in a number of AMCs coming out with changes in their funds. With a wave of changes coming in, you may wonder what constitutes a change in fundamental attribute and how you should act on it. Here, we explain what such changes can be and how it will impact you.  

 

What constitutes a change in fundamental attribute?

Fundamental attributes of a fund are the characteristics  which define a fund. For instance, a large cap fund will predominantly invest in large cap stocks and aim to generate capital appreciation. If there is a change in its fundamental nature, it will imply a change in the strategy of the fund. When that happens, there will be a shift in its risk characteristic. This is why you will have to evaluate if the fund still complements your portfolio.

Here are a few instances (not an exhaustive one) that constitute a change in fundamental attribute:

  • Change in category – moving from equity to debt  or large-cap to multi-cap or from a income fund to a credit opportunity fund and so on
  • Change in benchmark
  • Change in the universe of stocks or debt instruments or other securities that the fund will invest in
  • Change in the proportion of investment that the fund will make in a segment/category

Let us take the example of a recent change in Mirae Asset Emerging Bluechip fund. Originally a midcap fund, it has now been moved to large and midcap category. Even though the fund already had some large cap exposure, now it is mandated to maintain 35% in largecap. This limits the risk it can take and amounts to a change in its characteristic.  In such cases, you will be provided an option to exit the fund.

There can also be other changes that do not affect the nature of the fund. These may be change in name of the scheme, change in exit loads, etc. These are not considered as changes in fundamental attributes and you will not be given an exit window. For example, Parag Parikh Long Term Value fund has been renamed as Parag Parikh Long Term Equity fund. It continues to be a multi-cap fund and there is no change in its fundamental attribute. The change will have no window for exit and requires no thought or action.

 

Options for you

When changes in fundamental attributes arise, you are given an option to re-assess the suitability of the fund through an exit window.  The exit window usually lasts for a month and no exit load is charged during this period. During this period, you should  understand how the changes may affect the fund and see if it still fits your portfolio objectives. You will also have to look at whether your allocation to the fund remains appropriate in light of the change.

Say, a fund you hold changes its strategy from being a diversified fund to becoming a midcap fund. And you already have enough exposure to midcap space. The risk level of your portfolio then goes up and you may have to adjust the allocation accordingly.  You can make use of this exit window to switch into another fund which may be more suitable and in line with your original allocation. But this does not mean you will have to exit for every change that happens. For example, if a fund’s benchmark has changed from say Nifty 50 to Nifty 100, it may not necessarily mean your risk level is heightened.

What you have to do, is figure out if the change is significant enough for you to act on it. Any change in the risk profile of the fund, the category of the fund or addition of newer kind of instruments in the investment universe may all require a relook at the fund. If you’re unsure, you can talk to your advisor to understand better.

 

What happens when you hold/exit/switch

When an exit window is given, you may either continue to hold the fund or exit it. However, any switch or exit will still have tax implications. The law does not provide any tax exemption for this purpose. You will have to pay capital gains tax, long term or short term, depending on your holding period. If you continue to hold the fund which has seen a change in its fundamental attribute, nothing changes in terms of taxation; that is, you will not incur any tax until you redeem.

 

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