Fund names and exposures

Suresh Krishnamurthy

SEBI has taken note of the discordance between the character of the fund as suggested by its name and exposures taken by it.

For example, when a technology fund invests in banks, a pharma fund in a technology company and an Internet fund in a consumer company, the investor is most likely to be confounded. Understandably, this issue has created distortions that need to be ironed out. However, there are many shades to this issue.

First, consider the instances of Tata Core Sector Fund and ICICI Power. These funds were established with the purpose of investing in the core sector. However, they changed tack a few years after their inception, took advantage of the omnibus clauses in their offer documents and invested in technology sector companies.

Now, such a change in their investment focus has benefited the investors in the fund. But for the change in focus, most investors would have lost value considerably. The other side is the story of funds which have raised money from the market in recent times for investing a particular sector but in the end proved to be less focussed than they promised.

Essentially, in both the cases, the loophole seems to be the omnibus clauses in the offer document. SEBI may not be doing the right thing in asking fund managers to stick to the investment universe suggested by the name of the fund.

Instead, it would do well to enhance the quality of disclosures in offer documents. Funds should be made to stick to their declarations in the offer document, to enforce which the disclosures in the offer document need to get more specific. And if fund managers then feel the need to change the focus of their investments, they can make an open offer and allow a load-free repurchase or a switch. This, perhaps, would be a more desirable response from SEBI.