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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Quantum Long term Eq fund changes from Large cap to Value fund category. Is this Change in fundamental of fund.
There is no clear definition on SEBI Value fund category.
Hello,
Quantum Long Term Equity has followed a value-based approach even earlier. The value category by the new definition doesn’t specify a market-cap orientation; funds can do what they want. If the fund wants to hold a large-cap orientation, it can do so. So while the category changes, the fund’s strategy itself need not.
Thanks,
Bhavana
Quantum Long term Eq fund changes from Large cap to Value fund category. Is this Change in fundamental of fund.
There is no clear definition on SEBI Value fund category.
Hello,
Quantum Long Term Equity has followed a value-based approach even earlier. The value category by the new definition doesn’t specify a market-cap orientation; funds can do what they want. If the fund wants to hold a large-cap orientation, it can do so. So while the category changes, the fund’s strategy itself need not.
Thanks,
Bhavana
Hi Recently I received email from ICICI Prudential Long Term Plan is changing the fundamental attribute of the plan. How do I excercise the option of exit through fundsindia? Does funds india help with that?
Hi,
ICICI Prudential Long Term Plan is only undergoing a name change. The category of the fund remains the same. Therefore, there will be no change in the strategy and its position in your portfolio. Unless you need the money, there is no need to exit.
But if you still wish to exit,you can use the no exit load period. To exercise the option,you can simply redeem during the exit window from your FundsIndia account and no exit load will be charged.
Thank you,
Ashwini
Hi Recently I received email from ICICI Prudential Long Term Plan is changing the fundamental attribute of the plan. How do I excercise the option of exit through fundsindia? Does funds india help with that?
Hi,
ICICI Prudential Long Term Plan is only undergoing a name change. The category of the fund remains the same. Therefore, there will be no change in the strategy and its position in your portfolio. Unless you need the money, there is no need to exit.
But if you still wish to exit,you can use the no exit load period. To exercise the option,you can simply redeem during the exit window from your FundsIndia account and no exit load will be charged.
Thank you,
Ashwini
Hi,
I have got an email from ICICI AMC yesterday on fundamental attribute changes of Value Discovery. The changed mandate looks like that of a Balanced/Dynamic allocation fund.
Any views on this?
Hi,
There is no change in the strategy ICICI Pru Value discovery fund has been following. It has simply been categorised to comply with SEBI’s rules.
I’m assuming you think it looks like a balanced fund because it can go upto 35% in debt. But even previously, the fund had the mandate to go upto 20% in debt. This is just a leeway funds have when they don’t find opportunities. There is no change in its objective, per se. It remains a value oriented multi-cap fund.
Thank you,
Ashwini
Hi,
I have got an email from ICICI AMC yesterday on fundamental attribute changes of Value Discovery. The changed mandate looks like that of a Balanced/Dynamic allocation fund.
Any views on this?
Hi,
There is no change in the strategy ICICI Pru Value discovery fund has been following. It has simply been categorised to comply with SEBI’s rules.
I’m assuming you think it looks like a balanced fund because it can go upto 35% in debt. But even previously, the fund had the mandate to go upto 20% in debt. This is just a leeway funds have when they don’t find opportunities. There is no change in its objective, per se. It remains a value oriented multi-cap fund.
Thank you,
Ashwini
Thanks for the explanation.
Thanks for the explanation.
Hi Funds India Team,
I come back with another query, this time with Franklin India Smaller Companies Fund. This was basically a small and mid cap fund and by the mandate change it’s turning into a pure small cap fund with a bit of midcap. Considering the high AUM (especially for a fund which is increasing small cap allocation from mow on) what is your view on this?
Hi Funds India Team,
I come back with another query, this time with Franklin India Smaller Companies Fund. This was basically a small and mid cap fund and by the mandate change it’s turning into a pure small cap fund with a bit of midcap. Considering the high AUM (especially for a fund which is increasing small cap allocation from mow on) what is your view on this?