Don't let change in MF mandate perplex you. Use load-free exit option

Sometimes, they are innocuous ones. But use the load-free exit option if the new mandate doesn't match your goals

Recently, Sundaram Mutual Fund changed the mandate and the name of its Global Advantage Fund. Under the new name, Sundaram Global Brand Fund will move from being a fund-of-funds (FoF) that invested in a diverse set of overseas funds and exchange-traded funds across emerging market equities, commodities and real estate investment trusts to becoming a scheme that will focus only on global equities. “The change makes the investment mandate less complicated and focused on a single asset class – equities of top global brands. This will reduce the risk associated with multiple assets classes and emerging markets,” says Sunil Subramaniam, MD and CEO, Sundaram Mutual Fund.
 
There are several other mutual fund houses which have gone through the process of changing the mandate, or merging schemes. For example, HDFC Growth Fund was repositioned as HDFC Balanced Advantage Fund. Thereafter, HDFC Prudence Fund was merged into it. Mirae Asset Emerging Bluechip Fund was reclassified from its earlier positioning as a multi-cap fund to a large- and mid-cap fund. And this has been a common feature since the market regulator, the Securities and Exchange Board of India (Sebi), came out with the rationalisation and categorisation norms for mutual funds in October 2017 (see box). For existing investors in these schemes, the change in mandate does make a difference. The question: How should you evaluate the change?
 
Different mandate: A scheme’s investment mandate is designed to give investors clarity on the way it is going to be run. In other words, it informs investors that the fund manager will deploy the assets under management in stocks having a particular theme, or in certain asset classes.
 
However, sometimes the theme loses relevance, maybe due to the shrinking of the investible universe, forcing the fund house to change the mandate. For example, in a commodity bull market, investors may demand a scheme that invests in shares of commodity producers. But as the tide changes, such a scheme may not remain relevant. Changes in regulatory norms and taxation rules also at times make some schemes unviable.

Exit option for investors: Fund houses offer investors an exit window. “After Sebi approval for change in mandate is obtained, the investor is given a one-month period to exit the fund without an exit load. However the investor will have to bear the tax implications of the exit,” says Arun Kumar, head research, FundsIndia.com. In case you choose to redeem your investments, your gains will be subject to tax depending on the nature of the scheme and the time period for which you have held it. A point to note is that exit is optional. If you stay put in a scheme that has seen a change of mandate, there will be no tax implications for you.
 
The case for staying put: A change of mandate need not be bad for the fund, and there is no need to take advantage of zero exit load in all cases. Sometimes the changes are minor or just expansionary. They are unlikely to have a major impact on the scheme’s performance. For example, a moderate risk person may have invested in a fund that covers the top 200 stocks by market capitalisation. If the scheme wants to make it a top-100 fund, the risk will not be enhanced, and it remains a large-cap scheme. However, if it becomes a top-500 fund, the investor may wish to re-evaluate. In fact, even if it expands the mandate to top 500, you could wait for some time before taking a call to see how the fund performs under the new mandate. Exit only if the change affects the category allocation within your portfolio.
 
Align with goals: When the mandate is altered, try to understand the impact of the proposed changes. The investor should look at the merged scheme details in-depth and analyse whether the changed mandate meets his objectives. S Sridharan, head, financial planning, Wealth Ladder Investment Advisors explains this with an example. “Let us assume there’s an investor with the objective to fund his children’s education in about five years. He has chosen an asset allocation of 60 per cent in a large-cap biased fund and 40 per cent in a short-term debt fund. If the large-cap fund is being merged with a fund having a mandate to invest in large and mid-caps, the risk changes since there is exposure towards mid-caps. However, the investment objective is non-negotiable and hence the investor should to exit  rather than continuing with the merged scheme,” he says.
 
The investor should also do some research on how things are likely to change, and whether the new strategy is better than the previous one. In case he is unable to decide, he should consult a financial advisor.