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Guest Column Scheme re-categorisation: short-term pains for long-term gains

Scheme re-categorisation: short-term pains for long-term gains

The changes will benefit the AMCs, distributors and investors in the long run.
Lav Kumar May 24, 2018

By now, many fund houses have either merged or consolidated their schemes or are in the process of doing so.

These changes will have an immediate as well as far-reaching impact on the AMCs, investors and distributors.

Let us discover these one by one.

Immediate impact

AMCs: AMCs have adopted three ways to re-categorise their schemes – renaming, merging or changing the fundamental attributes. So far, AMCs offered schemes with overlapping features under the same category. Following SEBI guideline on scheme re-categorisation, AMCs are either merging similar schemes and renaming them or changing the fundamental attributes of the scheme to fit it into the mould.

Investors: Investors will now have greater clarity on a scheme’s attributes as they would be totally true to their label. The names too will very closely reflect the scheme’s mandate. This will make decision-making more informed and comparison easier.

Distributors: Distributors have greater clarity on AMC offerings. They can now give accurate advice to their clients based on product suitability.

Far-reaching impact

AMCs: Re-categorisation may also lead to funds having large AUMs. This means, such schemes would rework on commission structure of distributors. Also, with change in scheme attributes, there would be a churn in the portfolio that will push up cost. This in turn might adversely affect returns. Further, well-defined limits on capitalisation will limit fund manager’s style to some extent.

Investors: Though the regulator has intended to make it simpler for the investor, at least for now it has created some confusion among investors. Many schemes have high brand recall value. The change in name may confuse them and may discourage them from mutual fund investments. If an investor is not happy with the merged scheme and wants to exit, he/she would now have to pay capital gains tax. The re-hauling may adversely affect returns in the short term.

Distributors: Distributors’ role becomes more crucial as they would now have to explain the change to investors, reassure them and convince them to remain invested. Also, their commission may change with the size of the scheme after merger.

Key takeaways

Though the changes may seem to be massive, in most cases the characteristics of the schemes are not being changed. The equity-debt mix, large cap-small cap mix, etc. in the current portfolio needs to be analysed to understand the change that is expected in the schemes undergoing changes.

Existing schemes may involve tax implications. Distributors should recommend their clients to stay put at least for a year to let things stabilise.

The move will benefit the industry and investors in the long run. This will surely bring the industry closer to international standards. Short-term pains for long-term gains.

Lav Kumar is Head of Product & Business Development for LIC Mutual Fund and has more than 12 years of experience in the financial services industry.




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