If you’ve been ignoring the many e-mails being sent by fund houses about the recent changes to your mutual funds, it’s time to think again.

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Post Sebi's rationalisation of schemes, we’ve seen that number of funds are shrinking (although not as dramatic as expected), change in names and in some cases even significant changes in categories. Here is where it gets tricky.

A case in point is a scheme, which was hitherto in the ‘Hybrid – Balanced Fund’ category and now attains the categorisation of ‘Aggressive Hybrid Fund’.

On the face of it, the word ‘aggressive’ might send you into a tailspin... but guess what? Your fund was always aggressive with a 60% allocation to equity which could be managed within a range of 50-75%.

Additionally, the debt portion, which is marked at 40% could be scaled down to 25% on the lower end, but not exceed 40% on the upper end. So, all in all... the major change would remain the same.

Let’s now talk about a pure equity fund. There are funds belonging to the ‘Diversified Equity’ category, which have now moved to the ‘Large Cap Fund’ category.

A ‘Diversified Fund’ by it’s very name invests in companies regardless of size and sector. It diversifies investments across the stock market in a bid to maximise gains for investors.

The earlier mandate was simple – invest to maximise returns. The changed mandate reads – invest to maximise returns within the top 100 companies by market cap. This change has the potential to not just alter your returns but your risk profile as well.

Of late, a lot of investors have expressed interest in infrastructure funds. Now, as a sectoral fund, its mandate would be to invest in the infrastructure sector, which means companies involved in construction, roads or power.

But if it is categorised as a thematic fund, the mandate can be extended to all related sectors such as cement, capital goods, building products and even housing in some cases. As you can see, the scope and flexibility of the fund increases dramatically.

Another case is the very popular midcap funds. Here, the universe, as defined by the new Sebi rules, would be companies with a market cap ranking of 101 to 250 strictly.

Now, the major differentiator in this category has always been the stock picking ability of the said fund manager... but, the lack of flexibility may curtail his/her choices, thereby impacting your returns.

Infact, if anything small cap funds may find themselves at an advantage as a larger universe opens up for them.

Likewise, debt funds too will have to clearly define the maturity duration of their portfolios. This may make it easier for the investors to choose funds, but the flexibility of the fund manager may impact returns.

A fund previously known as ‘Aggressive MIP’ (monthly income plan) is now in the ‘Equity Savings Fund’ category.

Here, as an aggressive MIP, the fund might have been investing 16-30% in equity and the remaining in debt.

As an equity savings fund, it will cap debt exposure at a maximum of 35% and will essentially become more tax efficient as it will be taxed as an equity oriented fund.

As well, investors should monitor how the past performance of merged/changed schemes will be shown. Sebi has clarified that:

Weighted average performance of both schemes need to be disclosed when two schemes with similar features are merged and the surviving scheme has similar features as the originals.

Past performance of surviving scheme to be disclosed when two schemes are merged and the resultant carries only the attributes of one.

Past performance need not be provided when the merger of two schemes results in an entirely new third variety.

This is not to suggest that past performance is a guarantee of future returns. Whatever the case may be, the underlying thread remains that only a clear understanding of the funds you invest in can help you meet your objectives and maximise the returns.

Investors have an option to exit from a fund if they do not agree with changes proposed by the fund house.

This period is clearly mentioned in the communications from the fund houses explaining the changes to investors. However, one must consider tax implications of any decision to exit from a scheme.

Disclaimer: Consult a personal finance adviser before making changes to your portfolio.

First Published:May 8, 2018 8:41 PM IST