Following Securities and Exchange Board of India (SEBI)’s new fund classification rules announced in October 2017, all mutual fund asset management companies (AMCs) are altering the mandates of many of their schemes to fit them into the regulator’s categories. Here we examine the major mandate changes in the schemes of Reliance Mutual Fund. Have a look:
Reliance Regular Savings Fund – Equity (AUM: Rs 3,140 crore) to become Reliance Value Fund
This scheme, which has no investment style written into its mandate at present, will be mandated to follow a ‘value’ style and be called ‘Reliance Value Fund’. A value style is one which focuses on undiscovered stocks in the hope of benefiting when their value is recognised by the market. The scheme’s benchmark will change from the S&P BSE 100 to the S&P BSE Value Enhanced Index.
You may or may not agree with the ‘value investing style’, but is this what you signed up for?
In response to our query, Reliance Mutual Fund responded with the following statement.
“Reliance Regular Savings Fund – Equity Option was a diversified multi-cap fund. Since we already had a multi-cap fund, we are converting the fund into a Value Fund. Please note that the fund would continue to be managed as a diversified fund from a market capitalization perspective, and hence does not imply any change in strategy. However, going forward, the fund would invest predominantly into ‘value’ stocks, which are typically low P/E, high dividend yield, contra, etc.”
Reliance Top 200 Fund (AUM: Rs 8,825 crore) to become Reliance Large Cap Fund
A shift in mandate from the top 200 listed stocks by market capitalisation to the top 100 is drastic. It makes the fund a much more large cap one. Its current mandate allows its equity component (65-100% of total) to be invested in companies falling in the S&P BSE 200 Index. The new mandate will hike the equity component to 80-100% and require that 80% be confined to India’s top 100 companies by market capitalisation. In other words, the fund can become more equity-heavy and more large-cap heavy.
Reliance Mutual Fund stated in an email to us: “Reliance Top 200 Fund was always positioned and run as a large-cap fund (Value Research and CRISIL categorize the fund as large cap). The fund, even at present, has exposure to large caps (as defined by SEBI) greater than 80%. Hence, there is absolutely no change in the positioning of the fund. The Fund had to be renamed, since Top 200 is not aligned to SEBI’s definition of large-cap, which is based on Top 100. We also had to carry out certain changes in the asset allocation, where we had defined large cap in a particular manner, which had to be aligned to SEBI’s definition, resulting in fundamental attribute changes.”
Reliance Media and Entertainment Fund (AUM: Rs 68 crore) to become Reliance Consumption Fund.
The difference between media and entertainment and consumption is self-explanatory. The former concentrates on television channels, cable or direct-to-home providers, movie theatre operators etc while the latter is much broader including consumer durables and non-durables. The scheme’s benchmark will also change from the Nifty 500 Media and Entertainment Index to the Nifty India Consumption Index. If you had signed up to invest in media and entertainment companies only, too bad for you.
Reliance Mutual Fund said: “Reliance Media & Entertainment Fund, which was a sector fund, which would invest only in the stated sector is now being broad-based and made a consumption fund. We believe the broad-basing of the fund strategy would be in the best interest of investors.”
Reliance NRI Equity Fund (AUM: Rs 84 crore) to become Reliance Balanced Advantage Fund
The investment rationale behind this fund may have been somewhat ambiguous to begin with. It is difficult to see why NRIs or Non-resident Indians would need a special set of companies for investment, different from resident Indians. The existing mandate does not build any specific strategy for NRIs and hence the changed mandate may be an attempt to fix the original error. The scheme is currently benchmarked to the S&P BSE 200 Index. It will morph into Reliance Balanced Advantage Fund benchmarked to the CRISIL Hybrid 35+65 – Aggressive Index. It is currently only open to Non-resident Indians. This will change to residents and non-residents. The asset allocation limits for equity and debt of 65-100% and 0-35% respectively will stay the same.
The AMC stated: “Reliance NRI Equity Fund, where only NRIs could invest, is being converted to a different category – Balanced Advantage Fund. We had been intending to carry out this change, regardless of the scheme standardisation exercise, as we did not find merit in offering a product exclusively for NRIs. Lack of investor interest in the product, as evidenced by the fund’s small size, also warranted a change.”
By and large, Reliance Mutual Fund has avoided drastic reclassification in its mutual fund scheme changes. In our opinion, these four schemes remain areas of radical change. Investors should carefully consider whether they wish to remain part of them. Redeeming money before 28th April will save you from exit load but can attract a tax of either 15% or 10% depending on how long you have held the fund. In case you have held the fund for more than one year, your gains before 31st Jan 2018 will be exempted and you will also get a tax-free allowance of Rs 1 lakh per annum on your long-term capital gains.