MF schemes merger: Stay invested if new fund fits your goal, risk appetite

Tata Mutual Fund has announced the merger of Tata Quant Fund into Tata Flexi Cap Fund. The merger will come into effect on March 21, 2025.

 

"The Quant Fund has small assets under management (AUM) of ₹67.51 crore. Moreover, this niche strategy has underperformed relative to the broader flexicap category. Tata Mutual Fund probably aims to consolidate resources and reduce its cost of operation,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.

 

Why are funds merged?

 

A variety of reasons can lead to fund houses merging schemes. One is to have better synergy. “Merging funds can combine complementary or overlapping investment approaches for possibly better outcomes,” says Atul Shinghal, founder and chief executive officer, Scripbox.

 

Another reason is to comply with regulatory norms. “After Sebi came out with mutual fund categorisation norms in 2017, fund houses consolidated their funds to align with the defined categories,” says Shinghal. Fund houses were allowed to have only one fund in each of the major categories, which led to several mergers.

 

Fund managers also merge schemes to eliminate underperformers. When such funds get merged, their history gets erased, making the fund house’s performance look better.

 

Fund houses also merge schemes to cut costs and focus scarce fund management resources on their flagship schemes. 

Also Read: Axis Mutual Fund launches Nifty AAA Bond Financial Services Index Fund

 

When is it a positive?

 

Sometimes, a merger benefits investors by moving them into better-performing funds. “Merging an underperforming or low-AUM fund with a larger, well-managed one can enhance returns, diversification, and investment opportunities for long-term investors,” says Rajani Tandale, senior vice- president, mutual funds, 1 Finance.

 

Larger funds tend to have a more stable strategy and are more cost-effective. “A merger benefits investors if it lowers expense ratios through economies of scale,” says Kumar.

 

When is it a negative?

 

If the fundamental strategy and risk-return characteristics of the second fund (the one investors move into) are different, investors need to watch out. “If the asset allocation and level of volatility of the second fund are different, it can lead to unintended risks, making the fund unsuitable for certain investors,” says Tandale.

 

A higher expense ratio can dilute returns. A merger can also create a tax burden for investors. “It can trigger capital gains taxes for investors who decide not to continue with the merged fund and redeem their units,” says Shinghal.

 

Check portfolio fit

 

Before deciding whether to stay put or exit, investors should ask the question: Is the second fund a good fit in their portfolio? “Consider whether the new fund aligns with your long-term strategy and if staying invested supports your objectives,” says Tandale.

 

According to Kumar, if the fund offers improved diversification and lower fees, investors should stay put.

 

They should check the second fund’s historical performance. “The key factors to consider include the Sharpe Ratio (risk-adjusted returns), Jensen’s Alpha (excess returns over market expectations), and downside risk (possible losses in volatile markets),” says Tandale.

 

If the new fund suits the investor’s risk appetite and time horizon, they should stay invested.

 

“According to Sebi Mutual Fund Regulations, unitholders get a window to exit without paying an exit load, providing flexibility if they are unhappy with the change,” says Shinghal. If an investor decides to exit, they should do so during the load-free window, suggests Kumar.

 

An investor who exits and reinvests elsewhere should also ensure the new fund aligns with their goals to justify the tax hit.

 

 

Assess the tax impact

 

Investors exiting before the merger will incur a 20 per cent short-term capital gains (STCG) tax if their holding period is under one year 

For holdings exceeding a year, a 12.5 per cent long-term capital gains (LTCG) tax applies to gains above ₹1.25 lakh 

  Those who stay invested retain their original cost of acquisition and holding period, which get carried forward to the merged fund 

Tax liability arises only upon redemption, following the same STCG/LTCG tax rules

  If you are nearing the one-year holding period with substantial gains, consider waiting to qualify for the lower LTCG rate before exiting