Stay if the scheme is doing well

With more schemes likely to be merged, investors will get opportunity to exit bad schemes with no load

Srikanth Meenakshi’s, co-founder and chief operating officer, FundsIndia.com, advice to mutual fund (MF) investors facing merger of their scheme is simple: “If your scheme is merging with a performing scheme, then it makes sense to do so. Otherwise, exit the fund.”

In the coming months, many retail investors may have to take this very decision – to stay or exit their scheme. With the Securities and Exchange Board of India (Sebi) saying that asset management companies will have to put in one per cent ‘seed capital’ (up to a limit of Rs 50 lakh) in each of their schemes, many fund houses will have to take the critical call – whether to merge non-performing or small schemes with the larger ones or deploy more capital to keep them alive.

Typically, investors will be given an exit period of 30 days to decide whether you want to continue with the fund or move on. If you don't respond within the exit period there is a default action, which means that by default your investment will be moved to the scheme the fund house is retaining.

The good news is that there won’t be any exit load or taxes since it is a merger. But if you withdraw your money and move to another fund house you will be charged short-term capital gains tax, if your holding is less than one year

  

Sundeep Sikka, chief executive officer (CEO), Reliance MF, while saying that the Reliance Mutual may not have to merge schemes, says there is if there is a merit in merging schemes, either because schemes are similar or due to other market-related factors, fund houses may do so.“The move will increase the asset management companies' (AMCs) commitment in managing the fund and will be in the best interest of investors.” Agrees A Balasubramanian, CEO, Birla Sun Life AMC: “The requirement of seed capital needs will bring in sharper focus on the investment and also reflect the AMC's conviction into investing in various asset classes, which in turn could help investors' confidence too.”

 

The market regulator, on its part, has been pushing fund houses to merge schemes if there is an overlap in the investment objective. The regulator’s stance has been that if the fund house already has one scheme in a category, it should not launch a similar one just to garner funds through New Fund Offering. Meenakshi says a merger of schemes will make sense where the fund house has multiple schemes across categories. “It will de-clutter the landscape to a certain extent,” he says.

 

If you look at the top five fund houses (in terms of assets under management), all have more than one scheme in the large-cap equity category, according to data from Value Research. UTI MF has eight schemes, ICICI Prudential has seven , Reliance has five, HDFC has four and Birla Sun Life has two.  According to Dhirendra Kumar, CEO, Value Research, further clarity is required. “The money invested in equity funds will go up and down in value very quickly. The Rs 50 lakh invested can become Rs 25 lakh in no time. So, we need to wait till Sebi issues the operational guidelines,” he says.