Impact of Mutual funds reclassification on Investors

If you are wondering why you are getting name and category change emails from the mutual funds you have invested in, read on.

SEBI in October, 2017 passed an order to re-categorize and rename the Mutual Funds for standardization and to clarify the investment mandate of the funds.

Take a look at your investment portfolio to see what is happening with your holdings. Please note, not all changes warrant action and a majority of them are purely cosmetic in nature. The change can be classified across 3 levels.

Type of Change	Example	Next Steps
Name change	Templeton India Growth has followed a value-investing style since inception, so its rebranding as Templeton India Value is just a change in name.	Can stay invested. No change necessary.
Category change	HDFC Large Cap, which has had a concentrated portfolio, will now become a diversified large-and-midcap fund named HDFC Growth Opportunities.	Assess if you want to continue to remain in the same category, on case by case basis, as the risk may have gone up or down.
Scheme wound up and merged with another	L&T Taxsaver merged with L&T equity Growth changing categories from ELSS to Multicap.	Note that the merged scheme is affected  more.  Check if the investment mandate of the  new scheme is line with your investment objective and risk profile.
Other Steps
Note that incase of a change in the fundamental attribute of the scheme, investors have been offered an exit option without paying an exit load.  Check the overall asset allocation of your entire portfolio (debt/large cap/ mid cap/ small cap)and assess if you need to make adjustments to fit your risk profile and financial goals.
Impact on Returns
Given the stricter categorization, large caps will have to invest 80% of their holdings into the top 100 stocks, limiting the alpha of the returns and possibly not exceed index returns. Many large cap funds are moving to other categories large & mid-cap, multicap etc for higher returns.
Large funds emerging from merger of schemes focussed on mid/small cap may have difficulties churning the portfolio given lower liquidity hence impacting returns. Funds with lower AUMs maybe preferred over ones with very large AUMs, all else being equal.
Note that returns may get impacted in the short run as the fund managers churn their portfolios in line with the new categorization. Do not exit positions based on lower returns in the short term.
Note that a big change in the investment mandate will render the past track record irrelevant making it difficult to assess performance.