The Securities and Exchange Board of India had come out with a circular setting up norms for categorising schemes in October 2017. This was done to prevent the duplication of schemes and the use of confusing or potentially misleading names. Mutual funds were given two months to respond.
Following a consultation process, fund houses have now begun modifying schemes to comply with the circular. DSP BlackRock, one of India’s largest fund houses, has announced its changes today for 11 of its funds.
According to the asset management company, investors will be given one month starting from February 14th, 2018 to exit the fund without any exit load if they wish to do so. However, an exit will attract short-term capital gains for holding periods less than three years and long-term capital gains tax for longer holding periods.
In this article, we cover the changes affecting DSP Blackrock’s international funds. Watch out for our articles on the changes in the other funds of DSP BlackRock.
International funds of Indian fund houses are usually set up as fund-of-funds or FoFs. This means that they ‘feed into’ other international funds set up outside India. Typically they also hold a small amount of their corpus in money market instruments (in India) to smoothen the inflows and outflows in the fund. On the flip side, too much money kept for too long in money market instruments affect the ‘focus’ on the fund on the international fund it is investing in and reduces its returns.
SEBI has mandated that only 5% of the corpus of such funds can be held in money market instruments thereby sharpening their focus. DSP BlackRock had previously allowed its funds to have 10-20% in money market funds. This is now being reduced to 5% in compliance with the SEBI circular.
To comply with this requirement, DSP BlackRock has modified three of its schemes – DSP Blackrock World Mining Fund, DSP Blackrock World Gold Fund and DSP Blackrock World Energy Fund.
|Fund||Money Market Securities|
|Previous maximum||New maximum||Actual holding*|
|World Mining Fund||20%||5%||2.9%|
|World Gold Fund||10%||5%||2.7%|
|World Energy Fund||20%||5%||2.6%|
As on 31st Jan 2018
What this means is that it may reduce the flexibility available to the fund manager in terms of when to deploy money into the target fund. It may also make it difficult for him to meet sudden redemptions as well as large inflows. However, the fund may subsequently raise exit loads to curtail sudden outflows.
Should you exit?
No. At this stage, the change looks relatively minor. The current holdings of money market securities are already below the new scheme mandates. A hike in exit loads will not affect you if you are a long-term investor. On the other hand, if you exit now, you will be subject to capital gains tax even if there is nil exit load for next one month starting Feb 14.