Merger of MF schemes not benefiting investors: Report

AMCs have been opting for this to bury their poor performing schemes.

A recent surge in mergers of mutual fund schemes seems to have not benefited investors, says a mutual fund tracking firm’s study. Rather, the asset management companies have been opting for this to bury their poor performing schemes.

A report by MorningStar says the motive behind a host of scheme mergers is either to bury below-average performance or simply cut the number of offerings. “Investor interest is not overtly visible,” it adds. In 2003, the Securities and Exchange Board of India (Sebi) came up with its circular on the consolidation of schemes. It says such consolidations will be viewed as changes in fundamental attributes of the related schemes. The Asset Management Company (AMC) will be required to give unit holders the option to exit at the prevailing net asset value without exit load. AMCs were also required to disclose information pertaining to the investment objective, asset allocation and main features of the new consolidated schemes, among others.

However, upon finding no significant consolidations, the regulator stated a merger or consolidation should not be seen as a change in fundamental attributes of the surviving schemes if two conditions are met. One, the fundamental attributes of the surviving scheme do not change. Two, mutual funds are able to demonstrate that the circumstances merit merger of schemes and the interest of unit holders of surviving schemes is not adversely affected.

According to the report, some mergers seem to eliminate themes completely. “For instance, sectoral themes like FMCG, pharmaceutical or other market-based themes are done away with,” the report adds. This elimination, either due to themes that have become a thing of the past or even after doing well performance-wise, have not struck a chord with investors.

This may help a fund house more than an investor, the study says. “Amalgamation after due reasoning provided to investors for the sake of transparency could be good in provide clarity, as consolidating similar schemes is one thing, but merger for the sake of hiding below average performance or burying themes — is quite another.”

According to Value Research, the industry has in the first seven months of this year seen 41 mergers. This, where there were only 58 mergers between 2006 and 2010. A recent report said, “in the roster of practically...every Indian fund company — even the ones with the best investment management — there are some black sheep. These are funds, for whatever reason, which have lost a lot of money for investors. Eventually, these funds become a sore spot and a source of embarrassment.”

Next month, there are several schemes which are lined up for mergers. These are of fund houses which include Birla Sun Life, IDFC and UTI.