De-jargoned: True to label funds
A cursory glance through various mutual fund schemes would reveal to you that many of them do not appear to be true to label
How do you make sense of more than 1,000 mutual funds schemes that exist in the market today? One way is to look at the Scheme Information Documents (SIDs) that exists. Earlier this was known as offer document. An SID tells you what the scheme is all about, what it will do, its objectives and how and where it will invest.
For good measure, it also tells you an indicative asset allocation of the underlying instruments; the maximum and minimum limits it will adhere to while investing in its target segment of sectors and scrips.
But these are broad disclosures only. Your fund needs to do much more. It must invest in instruments that are in sync with its main objectives, as would have been stated by it. And this is where clarity helps.
For instance, if it is a large-cap equity fund, its SID will say how much it will invest in equities and how much cash it will hold in its portfolio. Over time—and as awareness has grown—many such large-cap funds have defined what a large-cap stock is. Now, if your fund manager (of a large-cap fund) invests in large-cap stocks, whose definition of a large-cap is indeed somewhat universally acceptable, then the fund is true to label. In simple words, are your fund’s investments in sync with what it says it actually does? If the answer is yes, then your mutual fund scheme is said to be true-to-label. With a true-to-label fund you get what you wanted to buy in the first place.
A cursory glance through various mutual fund schemes’ existing portfolios would reveal to you that many of them do not appear to be true to label.
According to data provided by Value Research, the average exposure of large-cap schemes to large-sized companies is 89%. Eight of these schemes have invested between 17% and 25% in mid-sized companies. A caveat: the market capitalisation definition here is as per Value Research and not that of individual fund houses.
Take the case of short-term debt funds. Typically, these schemes invest in scrips that mature on or before 2 years. But there have been schemes whose average maturities have gone up to as high as 4 years, in times when interest rates were falling.
According to the latest data provided by Value Research, there are six short-term schemes whose average maturities are more than 3 years.
The way forward
Although there are no written rules for what constitute true-to-label across various mutual fund categories, the capital market regular, Securities and Exchange Board of India (Sebi) has been nudging funds to be more and more specific about it.
For instance, all newly launched balanced fund schemes are now mandated to limit their equity exposure to up to 50%, as opposed to existing balanced funds (launched in earlier times) that can invest as much as 65-75% in equities.
Several officials within the Indian mutual funds industry have confirmed to Mint that Sebi asks for clarifications and insists on schemes’ SIDs to be clearer in terms of their investment objectives, whenever they file an application to launch a new scheme.
These officials also say that whenever they file for new SIDs, Sebi inspects their existing schemes as well and pushes those schemes as well to raise the bar.
In other examples, Sebi also insists on new schemes to specify if it is a short-term, medium-term or a long-term debt fund, irrespective of whatever name the to-be-launched scheme may have.
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