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What should an investor do when two mutual funds merge?
January 23, 2015

Ongoing consolidation in mutual fund industry has reduced options for investors. Investors in schemes that are getting merged into other schemes, have to take into account number of variables before taking a decision.

Author : Dr. Renu Pothen

 Fund house Merger moneycontrol

This article was published on on January 21,2015.

“Kotak Mahindra AMC acquires schemes of PineBridge Mutual Fund! “ – read the headlines on all major news channels on September 19, 2014. , This was the third acquisition in 2014 and it unnerved not just investors, but even experts like us. The first question that came to my mind was - Has the mutual fund business in India become so difficult that most of the foreign players are packing their bags and leaving? The paradox here is that while the new government is opening Indian shores to foreign investors, the mutual fund industry has decided to get into a consolidation mode. 

My previous article on states that “the mutual fund industry should not be subject to Charles Darwin's “Survival of the Fittest” theory. The Government should bring in strong measures which are conducive not only for the survival of foreign fund houses but also smaller domestic fund houses which are struggling to stay afloat in this tough environment. We believe that as the number of fund houses increases, the huge competition will check any misselling that is taking place and the existence of more foreign players will make the industry at par with global standards”. I continue to maintain this view and would suggest to Team NAMO that investors should be given enough choice when it comes to selecting mutual fund investments.

The Mutual Fund Industry consolidation has become a topic of discussion among our investors. The media is inundated with news every other day about some or the other fund house that is planning to shut down its business. In this scenario, my endeavor is to suggest a future plan of action that our investors need to take when two fund houses decide to merge.

Should Investors remain invested in the existing scheme or sell out?

The current trend in the industry is such that it is the bigger domestic fund houses which are acquiring the foreign fund houses. Names like HDFC Mutual Fund, Birla Sun Life Mutual Fund, SBI Mutual fund,Kotak Mutual Fund,etc  are not only the biggest fund houses in the industry but also boast of strong pedigree. In this scenario, investors need to ask themselves “Should the size of the fund house be the only criterion for holding onto existing schemes?”

For instance, during the ING Mutual Fund-Birla Mutual Fund transfer of schemes, one of the best performing funds from ING Mutual Fund was ING Dividend Yield Fund while Birla Sun Life Dividend Yield Plus was the best performing fund from Birla Mutual Fund. Hence, a merger of the former into the latter was not a big concern and investors who had invested into ING Dividend Yield Fund could continue to hold onto the existing scheme.

Now let us consider PineBridge Infrastructure & Economic Reform Fund, which has stood out among the infrastructure funds not only for its performance but also for adhering strictly to its mandate. This fund will soon become Kotak Infrastructure & Economic Reform Fund. In this case, investors need to be clear about certain things before they decide to stay on in the existing fund.

•    Will Kotak Infrastructure & Economic Reform Fund strictly follow the mandate?
•    Huzaifa Husain used to manage this fund based on the strong conviction that he had in the infrastructure space. Would the new fund management team also have the same conviction in the infrastructure story?
•    This is the first infrastructure fund from Kotak Mutual Fund. Does the Fund Management team have a well laid out strategy on how this fund will be managed in the future?
•    What is the track record of the Fund Manager and the expertise that he has in managing a sector like Infrastructure?
Investors should take an appropriate call only after getting satisfactory answers to these questions.

Another dilemma that investors would face on account of this consolidation trend is the concentration of schemes from the same fund house in their portfolio.

Let me quote another example.

Morgan Stanley A.C.E Fund became HDFC Small and Mid Cap Fund after the merger. Let’s assume that an investor already has three funds from HDFC Fund House like HDFC Top 200 Fund, HDFC Equity Fund and HDFC Prudence Fund in his portfolio. In this scenario, although HDFC Small and Mid Cap Fund is being managed by one of the best mid-cap fund managers in the industry (Chirag Setalvad), it would be advisable for the investor to move out from this fund as this will reduce the concentration risk.

Exit route and Tax Implications

As consolidation seems to be the new mantra of the mutual fund industry, investors should also time their exits in a smart manner. This means that investors should move out from the existing funds only during the exit option period. This will help them avoid any exit load applicable to the funds. 

For investors who decide to hold onto their existing funds, it is advisable that they check with their tax consultants for related tax implications.

My Take

If the mutual fund industry has decided to consolidate, then my advice to investors would be to take a cautious approach. What I mean here is that in the case of an acquisition, investors need to ask appropriate questions to the new fund management teams before they take a call to hold or exit from a fund. Investors should not go after size and lineage when it comes to taking a decision on their hard earned money parked in mutual funds.

My sincere appeal to the Finance Minister is to create a conducive business environment in the industry for both foreign and smaller fund houses.  New India does not believe in the age old approach of selecting fund houses based on size and pedigree. They want a wider selection of funds to choose from and even if a small fund house can match their expectations then pedigree can take a backseat.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.

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