Mirae Asset’s flagship equity scheme, the ₹10,560-crore Mirae Asset India Equity fund is being reclassified from multi-cap to large-cap and will be known as Mirae Asset Large Cap Fund. This means that the fund will have to invest at least 80% of its assets in the top 100 companies by market cap, giving up the flexibility to move between large, mid and small cap companies that it now enjoys. What should investors in this scheme do? We speak to the experts and give you some answers
In a notice released on 28th March, Mirae Asset announced the change in fundamental attributes in its flagship equity scheme. A multi-cap fund is allowed to invest in large, mid and small cap stocks without any restriction between the segments. A large cap scheme on the other hand is mandated to invest at least 80% of its assets in the top 100 stocks by market capitalisation. This raises concerns about the fund’s ability to give the same level of returns in a much more limited stock universe. The scheme’s benchmark will also change from the S&P BSE 200 Total Return Index (TRI) to the Nifty 100 TRI. The changes will go into effect on 1st May 2019. Investors who wish to exit the scheme can do so without paying any exit load from 1st April to 30th April 2019. The fund house has decided to make this change in order to maintain liquidity in the fund and to reduce risk. Large-cap stocks are relatively more liquid and less volatile than mid- and small-cap stocks, but could also give lower returns.
Mirae Asset India Equity Fund has beaten its benchmark and the category average over the past 10 years, 5 years, 3 years and 1 year. Its 1-year return (as of 31st March 2019) was 14.20%. Its 3-year, 5-year and 10-year returns were 18.11%, 18.34% and 22.88% respectively. These returns have in turn spurred inflows and caused the fund to grow to its present size. However, it is precisely this growth that has made it difficult for the fund manager to invest in mid- and small-cap stocks (which cannot easily be transacted in large volumes).
Swarup Mohanty, CEO of Mirae Asset Mutual Fund, stated that there was no significant change in the investment approach and that the fund had always invested over 75% in large caps and the balance in mid- and small-caps. He also pointed out the liquidity advantages of being in large-cap companies and the ability of the fund to absorb further inflows without compromising on liquidity or returns. “The reclassification would provide more flexibility to the fund manager, improve scalability and liquidity of the portfolio and can help provide better risk-adjusted returns. There shall be no significant change in the investment approach, than followed earlier,” he said. At present the fund has around 69% of its assets in large cap companies, according to Value Research data.
Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors, a SEBI-registered investment advisory firm, noted that different segments of the market perform well at different points of time and the reclassification has taken away the ability of the fund manager to take advantage of this aspect. In FY 2018, large-cap funds on average returned 12.32% compared to -1.18% for midcap funds and -7.72% for small cap funds.
“Investors can do this rebalancing themselves”, he added “but this attracts tax implications.” Redeeming an equity fund within one year attracts 15% short-term capital gains tax, and after one year attracts 10% long term capital gains tax (above gains of ₹1 lakh).
Amol Joshi, founder of Plan Rupee Investment Services, suggested that investors should reconfigure their investments towards mid-or small-cap funds to adjust for the change in this scheme. “If they cannot do so via fresh investments, I would recommend a partial exit from this fund to the extent of mid- and small-cap allocation. Investors should then deploy this money in mid- and small-cap funds,” he said. Reclassification can also render the past track record of a fund meaningless and strip the scheme of its ratings.
The Sebi-mandated reclassification exercise that took effect across the mutual fund industry in March-May 2018 caused several mutual funds to lose the ratings issued by agencies such as Value Research and Morningstar. “The change in fundamental attributes in Mirae Asset India Equity should have been done at the time of the Sebi- mandated scheme categorization and reclassification exercise that was recently concluded rather than now,” said Joshi.
Admittedly, changes in fund mandates of this nature are unwelcome. Investors who signed up for one type of product land up with another, without any say in the matter. They can exit without paying exit load but they have to bear the tax implications of an exit. That said, the fund has been run exceptionally well and its management remains intact. Although multi-cap in structure, the fund already has a strong-large cap tilt and hence the change in structure will not be a life-changing departure.
Investors should wait and watch for underperformance against the fund’s benchmark and category before taking any exit decision. Some investors may see their asset allocation shift towards large-caps with this reclassification. However, unless this impact is large in their portfolio, a compensatory redemption in favour of small- and mid-caps may be more costly and burdensome than it is worth, especially given the tax implications.