If you are an investor in the Parag Parikh Long Term Equity Fund, you have received an email from the fund house stating a few changes. From the Mutual Fund regulations point of view, these are fundamental changes to the scheme. As unit holders, you need to be aware of such changes.
Now, within a span of a few months, this is a second such change email from the fund house. The first one was about the enabling of the covered call feature.
You are likely thinking – “Is my investment safe?”
Before you start worrying, let’s find out, what are these changes and how do they impact your investment?
#1 Change in category of the fund
The fund house has decided to change its SEBI defined category from Multicap to the newly created, Flexi cap category.
Why? What was wrong with the multicap category?
As you must have noticed that a few months ago, SEBI gave out a diktat that all multi cap funds need to invest at least 25% of the fund value each in Large, Mid and small caps, respectively.
This would curtail investment styles of several fund schemes which relied on the flexibility offered by the multi cap category.
There was a lot of uproar and fund houses (aka AMFI) made representations to SEBI. As a result, in November 2020, SEBI announced a new category – Flexi cap. Basically, funds which want to retain their flexible character can choose the new category…and life goes on.
Given that Parag Parikh follows a dynamic strategy, it has chosen the new Flexi cap category. That allows it to operate the same way as it was doing before.
#2 Change in the name of the fund scheme to Parag Parikh Flexi Cap Fund
This one sounds dramatic but it isn’t. It is very cosmetic. To showcase the alignment with the new category, the fund scheme will now be renamed to Parag Parikh Flexi Cap Fund.
It is the same old wine in a new bottle.
#3 Provision for Segregated Portfolios
As you are aware, many debt funds had to suffer rating downgrades for some of their holdings.
To ensure that no undue benefit is taken by new investors because of such events, SEBI allowed creation of segregated portfolios. Every such holding which faces a rating downgrade is moved to a separate segregated portfolio, where it awaits recovery or write off.
If there is a recovery of the money, only those investors who were invested on the date of the creation of this portfolio, get the benefit.
Almost all mutual fund schemes are creating an enabling provision of this nature in the schemes. It doesn’t mean they have a holding which has been downgraded.
I repeat, it is just an enabling feature.
What should you do?
That is the big question on your mind. As you might have realised so far, all the changes are cosmetic in nature and do not impact the core functioning of the fund.
Simply put, you don’t have to redeem / sell because of these changes.
However, as per guidelines, the unit holders also have a right to exit the scheme, in case they don’t like the change. There will be no exit loads on redemptions till Jan 12, 2020.
The new changes comes into effect from Jan 13, 2020.
However, the taxation applies. If you are selling within one year of purchase, 15% Short Term capital gains tax is payable. If you have held for more than 1 year, Long Term Capital Gains tax at 10% is payable.
The first one lakh of overall long term capital gains across your stock / equity mutual fund holdings is exempt.
Between you and me: Are you planning to take action because of these changes? Do share in the comments.