Different mandate: A scheme’s investment mandate is designed to give investors clarity on the way it is going to be run. In other words, it informs investors that the fund manager will deploy the assets under management in stocks having a particular theme, or in certain asset classes.
However, sometimes the theme loses relevance, maybe due to the shrinking of the investible universe, forcing the fund house to change the mandate. For example, in a commodity bull market, investors may demand a scheme that invests in shares of commodity producers. But as the tide changes, such a scheme may not remain relevant. Changes in regulatory norms and taxation rules also at times make some schemes unviable.
Exit option for investors: Fund houses offer investors an exit window. “After Sebi approval for change in mandate is obtained, the investor is given a one-month period to exit the fund without an exit load. However the investor will have to bear the tax implications of the exit,” says Arun Kumar, head research, FundsIndia.com. In case you choose to redeem your investments, your gains will be subject to tax depending on the nature of the scheme and the time period for which you have held it. A point to note is that exit is optional. If you stay put in a scheme that has seen a change of mandate, there will be no tax implications for you.
The case for staying put: A change of mandate need not be bad for the fund, and there is no need to take advantage of zero exit load in all cases. Sometimes the changes are minor or just expansionary. They are unlikely to have a major impact on the scheme’s performance. For example, a moderate risk person may have invested in a fund that covers the top 200 stocks by market capitalisation. If the scheme wants to make it a top-100 fund, the risk will not be enhanced, and it remains a large-cap scheme. However, if it becomes a top-500 fund, the investor may wish to re-evaluate. In fact, even if it expands the mandate to top 500, you could wait for some time before taking a call to see how the fund performs under the new mandate. Exit only if the change affects the category allocation within your portfolio.
Align with goals: When the mandate is altered, try to understand the impact of the proposed changes. The investor should look at the merged scheme details in-depth and analyse whether the changed mandate meets his objectives. S Sridharan, head, financial planning, Wealth Ladder Investment Advisors explains this with an example. “Let us assume there’s an investor with the objective to fund his children’s education in about five years. He has chosen an asset allocation of 60 per cent in a large-cap biased fund and 40 per cent in a short-term debt fund. If the large-cap fund is being merged with a fund having a mandate to invest in large and mid-caps, the risk changes since there is exposure towards mid-caps. However, the investment objective is non-negotiable and hence the investor should to exit rather than continuing with the merged scheme,” he says.
The investor should also do some research on how things are likely to change, and whether the new strategy is better than the previous one. In case he is unable to decide, he should consult a financial advisor.