Reclassification of Mutual Funds

As per SEBI mandate in October 2017, all Asset Management Companies (AMCs) by March 2018 were required to reclassify, recategorize and merge their mutual fund schemes to eliminate confusion for investors. AMCs used to have multiple schemes with different names, but with the same structure and essence. The objective of this reform was to clearly demarcate the portfolios for investors to choose from.

Reliance Mutual Fund (RMF), one of the AMCs, had multiple schemes overlapping in structure which were confusing for investors.

In large cap funds, RMF had a Reliance Top 200 in the diversified large cap category in addition to the Reliance Focused Large Cap Fund.

In the Mid and Small Cap Category, RMF had

  1. Reliance Growth Fund which focused on Midcaps
  2. Reliance Small Cap Fund which focused on small caps and
  3. Reliance Mid and Small Cap Fund which invested in mid and small caps.

To be in line with SEBI mandates, Reliance chose to merge Reliance Focused Large Cap Fund (RFLF), a large cap fund, with Reliance Mid and Small Cap Fund (RMSF), a mid and small cap fund, to create Reliance Focused Equity Fund (RFEF).

RFEF is categorized as a Focused Fund and per SEBI Regulations, it cannot invest in more than 30 stocks.

The portfolio and investment strategy of RFEF is completely different from its’ erstwhile RMSF.

RMSF’s portfolio in March 2018 consisted of mainly mid cap stocks and up to 30% of its portfolio was in small cap stocks. Below is its portfolio:

In March 2018, RFLF’s portfolio consisted of 23 large cap stocks. Below is its portfolio:

On April 28, 2018, RFLF was merged into RMSF. Thus, RFLF holders were allotted units of RMSF on merger day.

Assuming an investor had 1000 units of RFLF on 27th April, 2018 at a NAV of ₹28.59. Thus, the investor’s holding in the fund was of ₹28,590.

RMSF on the same day had an NAV of ₹45.6637. Thus, the investor would be allotted (28950/45.6637) units of RMSF. i.e. 633.982 units of RMSF. The name of the merged scheme, was then changed to Reliance Focused Equity Fund (RFEF). Thus, the holder of 1000 units of RFLF would now be a holder of 633.982 units of RFEF

Prior to the merger, RFLF was managed by Meenakshi Dawar while RMSF was managed by Samir Rachh. Along with the merger and reclassification of the fund, the fund manager was also changed. Vinay Sharma was appointed the new fund manager of the focused fund.

The portfolio of the merged fund and post name change in May 2018 is below:

Thus, for the unit holders of RMSF, this would be complete change in the strategy, portfolio and fund manager from their original investment along with the name change.

For the unit holders of RFLF, this is a mere change in the name, the unit price, no. of units and fund manager. For the large part the portfolio has remained the same as it was before the merger and name change.

Should I stay invested in my current mutual fund scheme?

To know the answer to the above question one has to answer the following questions:

  1. Has the name of my mutual fund changed?
  2. Has the structure and the strategy of my mutual fund also changed?
  3. Considering my entire mutual fund portfolio and keeping in mind the portfolio allocation towards Small/Mid/Large do I want to stay invested in the current MF Scheme ?

You will need to analyze if the changes were just structural to stay in line with SEBI regulations or the changes signified a complete change in the investment strategy of the fund.

One should discuss with their financial advisor to see how the recent changes have affected their mutual fund portfolio and take appropriate action if necessary.

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