Article

What should you do if the name of your mutual fund changes?

07 Aug 2019

Mutual fund names can change for a variety of reasons. Fund names are generally changed under some very specific circumstances like when the ownership pattern changes or when there are changes in regulatory norms, etc.

Generally, this happens when an original partner’s stake is bought out by the domestic promoters. We saw DSP Blackrock change its name back to DSP Mutual Fund after it bought out Blackrock’s stake. We then have situations where a fund name was changed because the particular business group chose to sell out. For example, Kothari Pioneer was bought out by Templeton, Fidelity by L&T Mutual Fund, Alliance Mutual Fund by Birla AMC, and so on. Such circumstances obviously lead to a name change. However, the essential structure of the fund mostly remains the same in these cases.

Thirdly, fund names are changed based purely on statutory requirements for mutual fund classification.

Most importantly, a fund’s name might be changed due to a change in its essential focus (strategy). For example, a diversified fund may reposition itself as an index fund or a diversified fund may choose to become a sector fund. In this case, you have to be comfortable with the fundamental shifts in the nature and objective of the fund or look for other prospects.

So, how should you approach each of these cases?

Your strategy when the internal ownership structure changes

Many foreign funds came into India with expectations of rapid growth. However, devoid of any appropriate retail reach or the advantages of a bancassurance model, they typically found the going tough. In the past, many large global players like Merrill Lynch, Morgan Stanley, Goldman Sachs, Fidelity, Deutsche, and even JPM have opted out of the Indian mutual funds market as they did not find it too lucrative. This, however, does not make a substantial difference to the structure of the scheme. Unless you are really uncomfortable with the domestic group, you can continue.

Your strategy when the existing fund sells out to a new owner

In the last 25 years, many funds have sold out and exited the AMC business altogether. These include names like Goldman Sachs, Morgan Stanley, JP Morgan, Deutsche, etc. Much earlier, we saw the likes of Alliance, Zurich, and Fidelity sell out of the funds business altogether. This, again, is not a major cause to worry as long as the buyout is done by an Indian entity that can provide stability and a concerted strategy. You need not be in a hurry to sell out in such circumstances.

Your strategy if the fund changes its core objectives

This is a slightly more serious case and requires immediate attention from your side. For example, if a diversified equity fund repositions itself as a multi-cap fund, it means more allocation to mid-caps, which you may or may not be comfortable with.

There are cases where diversified funds convert to index funds or index funds convert to diversified funds. If you are not comfortable with the return and risk profile shift, you can always opt to switch out of the fund. In such cases, you need to sit with your financial planner and work out the implications.

For example, if you are holding on to an equity diversified fund for your retirement, then it will be sub-optimal if it converts into an index fund. The risk may be lower, but the returns will also be proportionately lower in this case. That could have a compounding effect on your long-term goals. It is always better to consult with your advisor if it impacts your long-term financial plan.

Your fund has been reclassified based on regulatory lines

One of the essential things that the recent Sebi reclassification norms did was to bring the names of mutual funds in line with the actual intent and content of the fund. As a result, many funds had to restructure and rename their schemes accordingly.

Let us look at two instances of balanced funds, to understand this point better.

First, there was ICICI Prudential Balanced Fund, which changed its name to ICICI Prudential Equity & Debt Fund; however, the objective of the fund remained the same. From an investor’s perspective, this is not something that really requires specific attention.

Then comes HDFC Prudence Fund, which changed its name to HDFC Balanced Advantage Fund; but the real issue here was that the essential strategy of the fund also changed. From being a traditional balanced fund with 40-75% in equities, the focus shifted to becoming a dynamic allocation fund where both equity and debt could range from 0-100%. For an investor, this would mean shifting from a more passive allocation to an active allocation.

In such scenarios, you need to sit with your advisor and ensure that such changes in a fund’s strategies are in sync with your long-term goals.

Remember, there are no tax implications for when schemes get merged or bought out. However, when you exit due to a shift in strategy, then it is considered to be a sale and has STT and tax implications. Consider this and make your call accordingly.

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What should you do if the name of your mutual fund changes?

07 Aug 2019

Mutual fund names can change for a variety of reasons. Fund names are generally changed under some very specific circumstances like when the ownership pattern changes or when there are changes in regulatory norms, etc.

Generally, this happens when an original partner’s stake is bought out by the domestic promoters. We saw DSP Blackrock change its name back to DSP Mutual Fund after it bought out Blackrock’s stake. We then have situations where a fund name was changed because the particular business group chose to sell out. For example, Kothari Pioneer was bought out by Templeton, Fidelity by L&T Mutual Fund, Alliance Mutual Fund by Birla AMC, and so on. Such circumstances obviously lead to a name change. However, the essential structure of the fund mostly remains the same in these cases.

Thirdly, fund names are changed based purely on statutory requirements for mutual fund classification.

Most importantly, a fund’s name might be changed due to a change in its essential focus (strategy). For example, a diversified fund may reposition itself as an index fund or a diversified fund may choose to become a sector fund. In this case, you have to be comfortable with the fundamental shifts in the nature and objective of the fund or look for other prospects.

So, how should you approach each of these cases?

Your strategy when the internal ownership structure changes

Many foreign funds came into India with expectations of rapid growth. However, devoid of any appropriate retail reach or the advantages of a bancassurance model, they typically found the going tough. In the past, many large global players like Merrill Lynch, Morgan Stanley, Goldman Sachs, Fidelity, Deutsche, and even JPM have opted out of the Indian mutual funds market as they did not find it too lucrative. This, however, does not make a substantial difference to the structure of the scheme. Unless you are really uncomfortable with the domestic group, you can continue.

Your strategy when the existing fund sells out to a new owner

In the last 25 years, many funds have sold out and exited the AMC business altogether. These include names like Goldman Sachs, Morgan Stanley, JP Morgan, Deutsche, etc. Much earlier, we saw the likes of Alliance, Zurich, and Fidelity sell out of the funds business altogether. This, again, is not a major cause to worry as long as the buyout is done by an Indian entity that can provide stability and a concerted strategy. You need not be in a hurry to sell out in such circumstances.

Your strategy if the fund changes its core objectives

This is a slightly more serious case and requires immediate attention from your side. For example, if a diversified equity fund repositions itself as a multi-cap fund, it means more allocation to mid-caps, which you may or may not be comfortable with.

There are cases where diversified funds convert to index funds or index funds convert to diversified funds. If you are not comfortable with the return and risk profile shift, you can always opt to switch out of the fund. In such cases, you need to sit with your financial planner and work out the implications.

For example, if you are holding on to an equity diversified fund for your retirement, then it will be sub-optimal if it converts into an index fund. The risk may be lower, but the returns will also be proportionately lower in this case. That could have a compounding effect on your long-term goals. It is always better to consult with your advisor if it impacts your long-term financial plan.

Your fund has been reclassified based on regulatory lines

One of the essential things that the recent Sebi reclassification norms did was to bring the names of mutual funds in line with the actual intent and content of the fund. As a result, many funds had to restructure and rename their schemes accordingly.

Let us look at two instances of balanced funds, to understand this point better.

First, there was ICICI Prudential Balanced Fund, which changed its name to ICICI Prudential Equity & Debt Fund; however, the objective of the fund remained the same. From an investor’s perspective, this is not something that really requires specific attention.

Then comes HDFC Prudence Fund, which changed its name to HDFC Balanced Advantage Fund; but the real issue here was that the essential strategy of the fund also changed. From being a traditional balanced fund with 40-75% in equities, the focus shifted to becoming a dynamic allocation fund where both equity and debt could range from 0-100%. For an investor, this would mean shifting from a more passive allocation to an active allocation.

In such scenarios, you need to sit with your advisor and ensure that such changes in a fund’s strategies are in sync with your long-term goals.

Remember, there are no tax implications for when schemes get merged or bought out. However, when you exit due to a shift in strategy, then it is considered to be a sale and has STT and tax implications. Consider this and make your call accordingly.