Research firms to review ratings of funds who made drastic mandate changes India’s premier fund mutual fund research companies Value Research and Morningstar have left the door open to a rating suspension where they feel a mandate change has been too drastic. The Securities and Exchange Board of India (SEBI) had in October 2017 announced a new mutual fund classification system. Following this, fund houses throughout the country began altering the mandates of their schemes to fit them into the new system.

The majority of mandate changes are technical in nature. However, a few changes do leave investors with completely different funds from the ones they signed up for. In such a situation, the ratings of a fund based on the previous fund’s performance or characteristics may no longer be valid. This is where the research firms may have to step in and withdraw the ratings issued until the new fund builds a certain amount of track record.

RupeeIQ got in touch with two leading research firms – Value Research and Morningstar – who do ratings of funds.

Value Research revealed plans to do a comprehensive review of ratings by the end of June 2018. Funds which do not pass muster in the review may see their ratings suspended if there is a ‘significant shift in investment mandate’. The rating will only be re-issued once they attain the performance history required for a rating.

This is what Ashutosh Gupta, Vice President at Value Research, said: We may suspend the rating of a fund in case of a change in its fundamental attributes, such as a significant shift in its investment mandate. Such funds will be rated again once they attain the performance history for the minimum period required for a fund to be rated under the new mandate.

We plan to do a comprehensive review by the end of June 2018 as we expect all fund houses to align their product portfolios to the new fund classification system prescribed by SEBI by then. That will allow us to put into effect all changes resulting from the said scheme reclassification at one go.”

Morningstar has also indicated a similar deadline based on its expectation that the fund portfolio realignment process will be completed by the end of June. However, its analysis of mandate changes is already underway. Several cases have ‘caught its attention.’ The rating company emphasized that it will pay close attention to how the fund manager intends to run the fund under the new mandate. A large-cap fund which has been re-classified as multicap may not be deemed a significant change if the manager continues to run the fund as large cap.

Here is what Kaustubh Belapurkar, Director of Fund Research at Morningstar India, said:

We are currently in the process of analyzing the revised mandates as announced by the fund houses. There are certainly several cases which have caught our attention and will undergo further scrutiny. But at this point I would like to highlight an important aspect; we will be viewing the mandate change not just from the perspective of what the revised mandate entails but also from the perspective of how the manager intends to run the fund within the confines of the revised mandate. For example, if a Large cap fund is now re-classified as a Multicap fund, doesn’t necessarily mean a significant move away from the previous mandate if the manager continues to run it with a Large Cap bias. Thus it will be important to analyse how the manager is actually going to manage the strategy within the confines of revised mandate. This is particularly true for categories that allow fairly broad mandates e.g. Multicap, Dynamic Bond, Dynamic Asset Allocation to name a few.

Managers have made their categorization lists public and are now in the process of aligning their portfolios with the revised mandates. We expect that this exercise should be completed by end of June. We will look to align our ratings around this time frame.”

RupeeIQ Take

We will have to await the outcome of the review process at both rating firms before we pen down our thoughts. However, we respectfully disagree with the implied Morningstar argument that fund manager intention can override the written text of a scheme mandate change. Running a multi-cap fund as a large-cap fund goes squarely against the spirit of the category chosen and the scheme mandate brought into force. We do not think a fund manager will be able to do so for too long and ultimately sooner or later, the written text of the scheme mandate (called SID or scheme information document) will prevail. Given this eventuality, it may be advisable to bite the bullet and make the rating decisions now rather than later, based on the mandate changes made.

Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at