Photo: iStock
Photo: iStock

Consider exiting if re-categorization changes the mandate of the schemes you are invested in

For an investor, the implication is that some of their funds could be re-categorized and/or merged with another scheme of the AMC

Can you please explain the recent mutual fund re-categorization rules? How will this affect investors?

—Ayushi Singh

A few months back, market regulator Securities and Exchange Board of India (Sebi) stipulated a set of rules to streamline fund categories, and asked mutual fund companies to comply with these in the next few months. There are three main parts to these rules that investors should be aware of. One, Sebi has listed a set of categories (with definitions) and has asked mutual funds to identify which category each of their fund belongs to. Two, once such a scheme has been pegged to a category, it has to stay within the boundaries of that category—it cannot move between categories (as many funds do today). Three, a fund company can have only one fund in one of these categories. For example, tax-saving fund is a category, and a company can have only one tax-saving fund in its roster. Similarly, only one large-cap fund; one mid-cap fund; etcetera. There are no such restrictions on sectoral funds. These can be as many as an asset management company would like to have. 

For an investor, the implication is that some of their funds could be re-categorized and/or merged with another scheme of the AMC. Any scheme name change would likely be due to such mergers. Investors would need to watch out to see if any of the funds they are holding are changing their stripes— that is, starts to have characteristics that are different from when it was originally invested in. And if yes, they need to take a call on whether or not to continue to stay invested in the fund. This could happen either via re-categorization or due to a merger with another scheme that has a different mandate. Either way, if that happens, investors would need to weigh their options about staying invested in the fund.

I want to increase my systematic investment plan (SIP) allotment this year but I may not be able to do so the next year. Is there a way to increase SIP amounts only for some time?

—Parakram Sharma

Increasing SIP amount temporarily should be possible, but the way in which you would go about doing it would depend on which channel you use to run your SIP through. If your SIPs are running on a new-age online mutual fund platform, increasing the SIP amount is likely to be just a matter of logging into your account and changing the monthly amount. And when you can no longer afford the increased amount, you can simply login and reduce it too. If, however, you are running your SIP through the traditional channel—of SIP forms and submitting them to the AMC—it would be a bit difficult to be this flexible. In this case, you would be better off starting new SIPs (in the same funds) for the incremental amount for the duration of this year alone (say, for 12 instalments). After these instalments are over, your new SIPs will stop and only the previously running SIP (for the current amount) will be running.

How should one go about choosing thematic or sectoral funds?

—Sejal Patel

Thematic or sectoral funds invest using a particular theme or in a particular sector (like banking or infrastructure) of the market. To invest in such funds, one needs to have knowledge about that theme or sector. One needs to not only know which fund to enter, but also when to enter, and importantly, when to exit. An investor would need to follow the economic scene and study the different sectors in the market to analyse and identify emerging opportunities. There is no thumb rule or short cut to identifying such openings.

Hence, investing in such a fund is significantly harder than investing in broadly diversified funds. For a regular investor who is not a professional in the financial markets, the only reliable way to invest in such funds is to follow the guidance of a trusted adviser who can do the due diligence for you in this regard. 

If you do not have access to such a person, you would be better off staying away from such funds and stick to regular market-cap-oriented broad market funds.

Srikanth Meenakshi is co-founder and chief operating officer,

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