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Are you wondering why you are getting name change and category change emails from your fund house? Last month, based on the instructions of the Securities and Exchange Board of India (Sebi), mutual fund houses recategorised their schemes. What does mutual fund reclassification mean for you and how does it impact you?

Not all mutual funds have changed. “Funds that have seen changes can be classified into three levels — funds that simply changed the name; funds that have changed the category; and funds that have wound up and merged with another fund,” said Srikanth Meenakshi, founder and chief executive officer, FundsIndia.com.

According to Meenakshi, of all the funds that have seen changes, around 50%-60% have only changed names. “For instance, ICICI Prudential Balanced Fund and is now ICICI Prudential Equity and Debt Fund. The characteristic remains the same,” he said.

Around 20%-30% of the mutual funds have seen a change in investment style. The remaining funds have either wound up their schemes and merged with another scheme. “The third type of change is in 5%-10% funds—you have scheme A and scheme B, where scheme B dies and merges with scheme A. It doesn’t have a big impact on scheme A, but there is a huge impact on scheme B,” said Meenakshi.

What should you do?

If you are a mutual fund investor, you have to firstly take a look at your investment portfolio to see what is happening with your holdings. You need to go through all the schemes that you have. If there is no change to your mutual fund scheme, then you don’t have to do anything.

However, it is important to be aware of any changes. Do take a look again and if you are wondering where to find the information, go online. From an investor point of view, the most pertinent change is the second and third type of change — where the scheme has either changed the category or has got merged with another one. “The funds that have had category changes and have been wound up and merged with larger scheme will require closer scrutiny. Here it varies from one fund to another. There is no blanket advisory possible at this point of time,” said Meenakshi. You have to see, especially on the debt side, whether the fund has gone from, say, liquid fund to ultra-short term. “In case you see a major change in the objective of the fund then you should take a relook. In the debt fund space, there hasn’t been much of a change,” said Lakshmi Iyer, chief investment officer — debt and head products, Kotak Mahindra Asset Management Co. Ltd.

Next, you have to check your overall portfolio and see whether you want to continue to remain in the same category. That assessment has to be done. The category changes are very diverse. Sometimes the risk has gone down, sometimes it has gone up. It has to be scrutinised on a case-by-case basis.

It’s that time of the year when most companies give out annual increments and bonuses to their employees. “Most big sectors such as telecom finalise their increments on 30 June. The projection for this year is 9.4% for existing employees. Our expectation is it will remain in single digit for two reasons—lower inflation and slower growth rate for companies. Also, the pay for middle-level management has improved significantly in India,” said Anandorup Ghose, partner, talent and rewards, Aon India. If you have switched jobs, it is likely that your raise would be in double digits, according to Michael Page data. Whether it is a double digit or a single digit raise, you should think of what to do with the money. Here is a look at who can splurge and who shouldn’t:

Improve your lifestyle

With increase in income, the most common question is whether you should save or spend more? “Are you likely to achieve your goals with comfort and retire financially independent, even without the increment? If yes, then you can use the additional money to improve your lifestyle or fund the occasional splurge, or even buy the latest television or smartphone. You can also create a holiday fund with the extra money using SIPs (systematic investment plans),” said Shyam Sunder, managing director, PeakAlpha Investment Services Pvt. Ltd. Once you have enough money built up, you can buy those tickets for your holiday.

“If you are investing from your salary to meet important goals, the bonus and increments can be used for lifestyle upgrade and vacation,” said Melvin Joseph, founder, FinVin Financial Planners.

Bump up your savings

If you struggle to meet your goals, you can use this time to rework your money life. “Earmark the monthly raise to fill the existing gap [the amount needed to fulfil a goal]. Avoid creating new goals. Target at least an annual increase of 10% in your investing capacity. That way with the increments, you will increase your net worth,” said Deepali Sen, a certified financial planner and founder of Srujan Financial Advisers LLP. You can start looking at investing every month. “However, if you find your future goals daunting, then the extra money should be put away carefully, and invested in line with your asset allocation. The increment is ideally suited for a new or additional SIP as it arrives every month. Using the SIP approach, you can invest in equity markets with confidence, removing volatility and harnessing wealth creation potential of equities. You can also use the accumulated wealth to handle your liabilities,” said Sunder.

Try to reduce your debts

If you have a personal loan or car loan, it is a good time to pay it off. “Repay high-interest loans such as personal or credit card loans first. Use this opportunity to run a financial plan, if you haven’t done it before,” said Mrin Agarwal, a financial educator, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra.

How to work on it? “If you have loans, it would be a good idea to utilise half the raise to increase the EMI (equated monthly instalment) and the other half for investments. The former will let you escape the circle of debt at the earliest and the latter will help you reach your existing goals sooner,” said Sen

In May, the mutual fund industry went through a name change for mutual fund schemes based on the recommendation of the Securities and Exchange Board of India (Sebi). To get a sense of what it means for the consumer, we spoke to Prateek Pant, co-founder and head products and solutions, Sanctum Wealth Management.

Edited excerpts:

Has the name change in mutual funds schemes made investors’ life easy?

In debt, we still have to see things come out. Debt is not yet fully implemented. In equity, the changes have happened. It will take time, but I think it is in the right direction. For instance, people are familiar with say IDFC Premier Equity Fund. Now if it is called IDFC Multicap, it will take time for people to remember that. We are taking some time to understand it. I think it is in the right direction because you are comparing apples to apples. It is definitely something that will help in the next few months and years to come. Right now, we are going through a transition and it will take time.

How do you analyse it?

We went through a whole exercise of scheme selection for large and midcap, mid-cap and multi-cap. However, 90% of the schemes are aligned. The biggest drawback of what has happened is the impact on historical performance. A lot of mutual funds were sold on past performance. Now what happens to past performance has gone out of the window. How do you then still get some sort of performance data and show that from a future perspective? This was the biggest challenge we faced for fund recommendation based on historical performance. First, we looked at funds as to how close they were to the mandate. Say, there was a large cap fund which invested 70% in large cap and 30% in midcap, we went down looking at performance which originated from large cap universe versus the alpha from midcap universe and strip that away. Now, he [fund manager] has to be 90% invested in large cap. We then looked at the pedigree of the fund manager and the fund house. We look at 1-year, 3-year and 5-year returns. We also look at up capture and down capture ratios.

Does it mean it will be difficult for a retail investor to choose direct fund?

In India, people still continue to try saving 40 paise or 50 paise. I have gone to some of my largest clients and family office and told them what I do. If you believe, as a wealth manager, I am adding value to your life, you may go for direct, but you will have to pay an advisory fee on it. Sophisticated investors would want to understand it better. It is not about past returns, but predictive returns. That is what we try to bring. We are not here to deliver a portfolio as per past returns.

Although all equity funds exempt you from paying long-term capital gains tax of 10.4% up to an amount of ₹1 lakh (apart from grandfathering clause), there is one breed of equity funds that give you tax deduction benefits at the time of making an investment. These are equity-linked saving schemes (ELSS), more popularly known as tax-saving mutual fund (MF) schemes.

An ELSS gives you tax deduction benefit of up to ₹1.5 lakh under Section 80C. This is the only pure equity investment vehicle that offers Section 80C deduction benefits.

The only catch here is it comes with a 3-year lock-in. Other equity funds don’t carry a lock-in. Remember, the lock-in also applies to your systematic investment plans (SIP); every monthly instalment you make in an ELSS is subject to a 3-year lock-in.

Other than deduction benefits and the lock-in, an ELSS is quite the same as a diversified equity fund. It invests in equity shares of companies across sectors and market capitalisations. When investing in ELSS, care should be taken to not invest in a new scheme every year to save taxes. One ELSS in the portfolio—in which you keep topping up every year—is more than enough.