Mutual fund merger: What investors need to know and how to stay ahead

When you invest in mutual funds, you may come across some terms that may sound a bit complicated. One such term is mutual fund merger. Like any financial instrument, mutual funds undergo changes due to market conditions, regulatory decisions or business strategies. One of these changes is a mutual fund merger, which can impact investors in several ways.

But what does it mean? How does it affect your investment? This article will explain the concept of mutual fund mergers, why they happen, what SEBI regulations govern them and what investors should do in such cases.

• Table of contents

• Understanding the concept of mutual fund merger
• Reasons for a mutual fund merger
• Regulations laid down by SEBI in case of a mutual fund merger
• Steps to take when your mutual fund merges
• Impact of a mutual fund merger on investors

Understanding the concept of mutual fund merger

A mutual fund merger occurs when two or more mutual funds combine into a single fund. This can happen when a fund house decides to combine existing schemes to improve efficiency, streamline operations or meet regulatory requirements.

In a merger, one mutual fund absorbs another and investors in the absorbed fund receive units of the surviving fund based on a predetermined ratio.

Key aspects of a mutual fund merger:

• The merging fund (absorbed fund) ceases to exist.
• Investors are transferred to the surviving fund.
• The Net Asset Value (NAV) of the merged fund is adjusted accordingly.
• The fund’s investment objective, management style or expense ratio may change.

Reasons for a mutual fund merger

Regulatory compliance

The Securities and Exchange Board of India (SEBI) has laid down specific guidelines to ensure mutual funds do not operate multiple schemes with similar objectives. To comply with these norms, asset management companies (AMCs) consolidate overlapping schemes

Low asset under management (AUM)

A mutual fund with a small AUM may struggle to cover operational costs. Merging with a larger fund allows investors to benefit from economies of scale and better fund management.

Poor performance

If a mutual fund consistently underperforms, the AMC may decide to merge it with another scheme to protect investors’ interests and improve overall returns.

Streamlining fund offerings

AMCs often launch multiple funds over the years. To simplify their offerings and avoid duplication, they may merge similar funds into one.

Change in business strategy

If an AMC decides to exit a specific category of funds or focus on other investment areas, it may merge funds accordingly.

Regulations laid down by SEBI in case of a mutual fund merger

1) Investors must be given the option to exit with a 30-day notice period.

2) To help investors make an informed decision, the following key details should be provided:

• Latest portfolio of the schemes involved.
• Financial performance of the schemes since inception, compared against relevant benchmarks.
• Key characteristics of the new merged scheme, including asset allocation and investment objectives.
• Explanation of unit allocation through a numerical example.
• Ratios of non-performing assets and liquid assets to net assets for each scheme and the consolidated scheme.
• Tax implications for unitholders due to the merger.
• Any additional disclosures required by the trustees.
• Any additional disclosures mandated by the board.

3) Investors choosing to exit will not be charged an exit load.

Steps to take when your mutual fund merges

Read the official communication

First, carefully read the notification sent by your AMC. It will contain details about the merger, including the new fund’s objectives, risk profile, and investment strategy.

Compare the new fund’s features

Check if the surviving fund aligns with your financial goals, risk appetite and investment horizon.

Check for exit load-free period

SEBI mandates that investors should be allowed to exit without an exit load before the merger. If you are not comfortable with the changes, you may redeem your units without incurring additional charges.

Assess tax implications

While a merger is not considered a taxable event in India, redeeming your investment might attract capital gains tax. Consult a tax advisor if needed.

Monitor performance post-merger

If you decide to stay invested, keep an eye on the new fund’s performance over time and evaluate whether it meets your expectations.

Impact of a mutual fund merger on investors

Change in fund objectives and strategy

The new fund may have a different investment objective, risk level or asset allocation strategy. Ensure that it aligns with your financial goals.

Change in expense ratio

The expense ratio of the new fund may be higher or lower than the previous one. A higher expense ratio can reduce returns over time.

Potential for better returns in long run

If the merged fund has a better track record, investors may potentially benefit from improved returns.

NAV and unit allocation adjustments

Investors’ units are reallocated based on the NAV conversion ratio, which may result in a different number of units in the new fund.

Conclusion

Mutual fund mergers are a part of the financial landscape and are often undertaken for the benefit of investors and fund houses. While they can bring advantages like better fund performance potential and operational efficiency, investors must stay informed about changes and evaluate the impact on their portfolios.

By understanding the reasons behind mutual fund mergers, SEBI regulations and their impact, investors can make informed decisions and take necessary actions to safeguard their investments.

FAQs:

What happens when funds merge?

When mutual funds merge, the absorbed fund ceases to exist, and investors receive units in the surviving fund based on a pre-determined conversion ratio. Investors can choose to stay invested or exit without an exit load.

Why do mutual funds merge?

Mutual funds merge for various reasons, including regulatory compliance, poor performance, low assets under management, or to streamline fund offerings. Mergers help AMCs manage funds more efficiently and improve investor returns.

Is it okay to have multiple mutual funds?

Yes, diversifying across multiple mutual funds can mitigate risk and improve returns. However, holding too many funds with similar objectives may lead to portfolio overlap and unnecessary complexity. It is advisable to have a well-balanced and diversified portfolio aligned with financial goals.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.