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Why MIPs Are Transforming Into Pure Debt Funds? - Outside View by PersonalFN

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Why MIPs Are Transforming Into Pure Debt Funds?
Jun 9, 2017

Mutual fund houses often cry over the lack of retail participation in the Indian capital markets and try to justify their commission-driven business models. But instead of winning over the investors' trust by being more transparent and competent, some prefer to be diplomatic with their investors. In an attempt to secure their asset base, they don't communicate fundamental changes clearly, and later try to hide behind technicalities.

Recently, Birla Sun Life Mutual Fund modified asset allocation structure of 3 of its Monthly Income Plans (MIPs). As per the new mandate, the equity exposure of these schemes will be in the range of 0 - 10%. Later the fund house changed their names too. After these modifications, erstwhile Birla Sun Life MIP (BMIP), Birla Sun Life Monthly Income, (BMI) and Birla Sun Life MIP II - Savings 5 Plan (BMI5) are now Birla Sun Life Long Term Accrual Fund (BLAF), Birla Sun Life Low Duration Fund (BLDF), and Birla Sun Life Credit Opportunities Fund (BCOF) respectively.

And, here's the problem.

As per the guidelines issued by Securities and Exchange Board of India (SEBI), a fund house must offer an exit route to an investor when it introduces a fundamental change.

Birla Sun Life Mutual Fund allowed mutual fund investors to exit without being subject to an exit load, when it changed the asset allocation pattern. However, it didn't offer any exit route to investors when it changed the names of the schemes and reclassified them as debt funds. Apparently, it freed equity fund managers from the responsibility of managing these schemes. And now, a debt-fund manager is managing these three schemes. This happened before it put up the notice of change in the name of aforesaid schemes.

This is grossly unfair to investors. After all, many of them invest in mutual fund schemes relying on the information provided on the website. Although investors are expected to read the Scheme Information Document (SID) carefully before investing, they hardly do so, given their time constraints. However it seems, Birla Sun Life Mutual Fund wasn't confident about being able to retain the Assets Under Management (AUM) had it offered an exit option even for the change in the name of schemes.

Commenting on this development, Birla Sun Life Mutual Fund offered this explanation - "We had given an exit option after our 24 March circular. In fact, as per the revised asset allocation laid out in the March notice, it is clear that the said schemes can invest as little as nil and as much as 5% in equities in two of schemes and up to 15% in the third scheme. The same mandate allows the fund managers to have zero exposure in equities. That option still prevails, so nothing has changed. Hence, there is no need to give an exit option."

In our view SEBI should (and hopefully it will) probe this matter to safeguard the interest of investors. However, what's more concerning is the plausibility of the fund house's argument. The tone of its argument is, why the name change should again qualify as a fundamental change when the change in the asset allocation has already been communicated, allowing mutual fund investors an exit option.

It conveniently overlooks a change in the asset allocation indicates that the fund house wants to give more flexibility to its fund manager during asset allocation. But if it's followed by the name change and the disassociation of equity fund managers from the scheme operations, it would mean much more. All these actions collectively suggest that, schemes we've discussed here have opted for a 360 degree change, and Birla Sun Life Mutual Fund has communicated these selective changes. This action doesn't befit the market positioning of the fund house.

What should you do if you hold these funds?

It seems, all three funds may be unable to generate returns on expectations, since equity would rarely feature in the portfolio's future. If you have opted for dividend option, the quantum and frequency of dividends may change too. You must consult your investment advisor and take action keeping in mind your risk appetite and financial goals. PersonalFN is of the view that, investors need to monitor their investments for such "inconspicuous changes". If you find it difficult to keep a track of your own investment, you may rely on the unbiased mutual fund services offered by PersonalFN.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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Jul 18, 2018 03:37 PM