When MF schemes merge

Stay invested if the scheme is merged into a broad-based fund with low volatility

With the Securities and Exchange Board of India expressing displeasure at the rising number of similar-themed schemes, mutual fund houses are making a conscious effort to merge schemes. In 2012-13, 27 mutual fund schemes were merged compared with 46 in 2011-12, indicates Value Research data.

This is good news for investors. After all, it isn’t easy to choose from 2,500-3,000 schemes. Hemant Rustagi, chief executive, Wiseinvest, says, “If the fund it’s being merged into is already a strong one, its returns will remain steady, irrespective of the merged scheme being weak or underperforming. Also, it’s better if the scheme merges with a broad-based/diversified equity fund in which volatility is less.”

Sample this: When thematic fund Reliance Natural Resources Fund was merged with Reliance Vision, a large-cap fund, an exit was feasible for investors who believed in natural resources as a growth story and didn’t want the investment objective to be diluted.

For those investing without particular investment preference, a merger doesn’t make a difference. Suresh Sadagopan of Ladder 7 Financial Advisory Services recommends one should ensure he/she isn’t investing in something the portfolio concerned already has enough exposure to. In other words, if you would end up with a large-cap fund (after a merger) and if you already have some money locked into a similar fund, weigh your options and take an investment call accordingly.

Surajit Misra, executive vice-president and national head (mutual funds) at Bajaj Capital, says, “If both the schemes that are being merged are underperforming and weak, one should not think twice and clearly opt out of it.”

Serious investors might also consider an exit from a merged scheme in case the fund manager changes. While this is an important factor, your investment decision can’t depend solely on this parameter “It’s the fund house’s track record that needs to be taken into consideration, not just the choice of fund manager. If you have confidence in the fund house and it has some good performing funds, stay invested, irrespective of the fund manager,” Rustagi says.

“Usually, the fund house will intimate their investors at least 45 days before taking a decision on a merger. The fund house doesn’t levy any exit load to such investors during that period. Therefore, investors should use this time to evaluate their options and take calculative decisions,” says Misra.

From a fund house’s point of view, the recent reduction in securities transaction tax (STT) from 0.25 per cent to 0.001 per cent is an attraction towards a merger.