Why you must revisit your Mutual Fund Portfolio Now?

With the increase in awareness of Mutual Funds, many indian investors are preferring SIP route for savings for both near and long term goals. Long term investments or staying invested is a recommended route and every retail investor has figured out that by now. However, every investor need to remember they need to re-balance his/her portfolio during periodic intervals (3 years atleast). 

Why does the Indian Retail Investor need to revisit his/her MF portfolio now?

• SEBI has specified 36 categories of mutual fund schemes in total. As per the new rules, the AMCs will not be allowed to offer two schemes under different names with identical investment mandates. One category of mutual fund will be permitted to sell only one mutual fund scheme. As a result of this mandate, the fund houses are now realigning their schemes and portfolio to classify them under the newly formed categories.

• Prior to the latest regulation, there was lack of clarity regarding the what constituted a specific category of mutual fund. There were thin lines of differentiation especially as regards large-cap or multi-cap. The asset allocation and the overall risk profile of the fund did not follow the investment mandate. After the recategorization, SEBI has specified the entire universe of mutual funds to be classified under these 5 categories i.e. Equity, Debt, hybrid, Solution oriented and others.

• The new regulation calls for a renaming of the schemes to clearly indicate the level of risk involved in the investment. Now, the fund houses would have to drop fancy names from their mutual fund offering to reflect the true picture. Earlier, the mutual fund scheme name consisted of words like “opportunities”, “advantage” and “prudence” to make it look seemingly lucrative. However, the investor was unable to gauge the inherent risk while making an investment. After passing of the regulation, many scheme names have been changed in order to enhance existing disclosure.

• There were a lot of irregularities in equity funds as regards their asset allocation and definitions. For instance, a large-cap equity fund would be substantially invested in small-cap stocks in order to generate a higher rate of return. On one hand, investors seemed satisfied because the returns were in line with their expectations. However, they were unaware of long-term implications of such digressions from the investment mandate of the fund. In the long-run, a slump would have washed out all the temporary gains in the fund value which were made during the period of a market rally.

• In an attempt to ensure standardization, the definitions of large-caps, mid-caps, and small-caps have been modified. After implementation of the regulation, large-cap stocks would be the top 100 companies of the underlying benchmark in terms of full market capitalization. Mid-caps would be companies ranking from 101st to 250th and small-caps would be companies ranking from 251st onwards in terms of full market capitalization.

• Mutual fund houses would have to pick stocks from the list which would be prepared by the AMFI. It would upload the list on its website and update it after every six months according to the data available in June and December.

SEBI Circular: 



https://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html

With the above regulation, many MF’s which were top in the respective category faced losses as the Fund Manager’s need to device a new strategy and plan in selection of stocks and generate the expected returns.

How Should the retail embrace this new regulation? 

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