When your fund house gets taken over

While it might not make sense to exit the scheme immediately, put fresh investments on hold for six months

In the past three years, as many as seven foreign houses have closed shop in India. The recent one, J P Morgan Asset Management Company, sold its mutual fund business to Edelweiss, a relatively smaller fund house. For investors in the existing fund house, it is always a worry whether their money will be managed well by the new fund house. In case of confusion, follow a three-pronged strategy.

The scheme: When one fund house takes over another, the investment objective of your fund could be altered. “The first question to ask is whether the fund will continue to be run according to its original mandate,” says Kaustubh Belapurkar, director (research) at Morningstar India. If the fund was large cap-oriented earlier but will now follow a mid-cap strategy, decide whether you need another mid cap fund in your portfolio. Sometimes, funds get merged to avoid duplication. If this happens, make sure the fund it is being merged into has a good track record.

Fund manager: When acquisitions happen, the fund management team sometimes gets absorbed and sometimes doesn’t. A new fund manager could be placed at the helm. “Find out if the new fund manager is adept at executing the strategy of your fund,” says Belapurkar. If you have invested in, say, a pharma fund, the new fund manager should have experience at managing such a fund. You should also be comfortable with the new person’s management style. “Some fund managers are growth oriented while others have a value orientation. Your investment philosophy should be in sync with that style,” says Manoj Nagpal, chief executive officer, Outlook Asia Capital.

Look at the fund manager’s experience and track record to see how well he has performed with similar funds.

Fund house: Under the new dispensation, the investment philosophy, approach and processes could all change. Evaluate the new fund house thoroughly. Has it been around for long? Do its funds have a good track record? Does it have a reputation for investor-friendly practices?

When a foreign fund house gets acquired, the inputs it received from its global research teams are no longer available. This doesn’t matter in case of fund-of-funds if the parent fund remains the same. But, other qualitative issues count. For instance, if a fund house that predominantly managed passive funds gets taken over by a fund house that is better known for its active fund management, you need to ask if the passive funds will receive the same degree of attention.

Don’t react in haste when a takeover is announced. Put fresh investments on hold and wait for six months to see how things pan out. Make a decision only when there is complete clarity.

If you are not satisfied on any of the three counts after this period, exit. “Pay attention to exit load and capital gains tax when exiting,” suggests Nagpal. The fund house may provide a window of, say, 45 days during which it will waive the exit load. If you exit the fund afterwards, try to wait out the period for which the load applies. The tax incidence should also be factored in. You will be liable for taxation if you exit an equity fund in less than 12 months. In a debt fund, you become eligible for favourable tax treatment only after three years. As far as possible, try to avoid these costs.