One development due to which a fund takeover nowadays triggers wholesale changes in funds is the Securities and Exchange Board of India’s (Sebi) categorisation and rationalisation norm introduced in October 2017. “According to Sebi
norms, funds are allowed to have only one scheme per category,” says Arun Kumar, head of research, Fundsindia.com.
Once Sundaram takes over Principal’s schemes, there will be a lot of overlap (see table). “What investors have to watch out for is that after the takeover, Sundaram AMC will have to merge a few schemes and reclassify others,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India.
It remains to be seen which fund house’s scheme gets merged into the other, and which of the two current fund managers—from Sundaram or from Principal—runs the fund in the future. Sundaram Midcap and Principal Emerging Bluechip are the two flagship schemes of the two fund houses with large AUMs.
Watch out for change in mandate
You may have invested in a particular scheme because you liked the fund manager’s track record. Or you may have invested in it because its investment mandate fitted into your portfolio.
Watch out for any change in style if a new fund manager takes over. “Investors should pay attention to what their fund’s investment style will be in future,” says Belapurkar. Most fund managers have a trademark investment approach developed over the years. Some are growth or momentum oriented, some follow a growth-at-reasonable-price (GARP) approach, while some are value oriented. Once they take over the fund, they will reshape the portfolio to reflect their style. Use a style box to see where the funds you own fit in terms of style. If the takeover results in a value-oriented fund becoming growth oriented, and you already own enough growth funds in your portfolio, you may have to exit.
Besides investment style, a fund’s market cap orientation could also change. If, for instance, a large- and midcap oriented fund becomes a large-cap fund, and you already have adequate exposure to large-caps, you may have to consider exiting.
What should you do?
Avoid a kneejerk reaction to this development. If there is a change in the fund’s mandate, you will be informed about it. The fund house will also offer a period when you will be able to exit without paying an exit load.
If a fund manager with a good track record takes over a fund you are invested in, and its style and investment mandate remain unchanged, give the new fund manager at least two years to demonstrate his ability.