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What Should You Do in Case of a Mutual Fund Merger?

03 August 2022

A Mutual Fund is a professionally managed investment vehicle that is funded by investor contributions for the purpose of making investments on their behalf. These funds are invested in securities by Mutual Funds, including stocks, bonds, money market instruments, etc.

Mutual Funds are ideal for investors who want to buy such securities but lack the time or knowledge to do so. Professionals are in charge of managing these funds, strategically allocating the money for the benefit of the investors' capital gains and income.

In order to bring consistency among similar schemes introduced by the various Mutual Fund Houses, SEBI (the Securities and Exchange Board of India) introduced new and broad categories for Mutual Funds in October 2017.

Therefore, numerous AMCs (Asset Management Companies) either have consolidated their scheme into a pre-existing scheme or decided to merge with another pre-existing scheme to create a brand-new scheme in order to abide by the SEBI's guidelines.

In this blog, we have thoroughly covered what you, as an investor, can do in the event of a Mutual Fund Merger.

What is a Mutual Fund Merger?  

Mutual Fund Mergers occur when two or more Mutual Funds Investment schemes or plans are combined to create a new scheme or are merged into an already existing Mutual Fund scheme. 

Reasons for A Mutual Fund Merger

The regulatory guidelines by SEBI, which prohibit asset management companies (AMCs) from having overlapping, similar schemes to avoid clutter for investors, are one of the main causes of MF Mergers in India.

Additional justifications for mutual fund mergers include:

  • Rationalization of Costs

You should reject the merger in case your fund has been performing well. This is due to the fact that a fund house that forces a redemption in a speculative environment in an effort to cut costs at the expense of the investor is not looking out for your best interests.

  • Holding Onto Assets

Investor discretion is required if asset preservation is the driving force behind a merger.

  • Redemption Anxiety

You can continue holding your investment in the fund if a well-performing fund is being redeemed as a result of conservative investors' panicking.

  • Merging of Opposites

Redeem your investment and transfer the corpus to another successful fund with the same sector or theme if you have a solid, favourable opinion of the sector's or theme's performance.

  • Insufficient & Inadequate Performance

You must learn more about the scheme into which your fund is being merged if it is being done so because it is not sufficiently performing. Letting your money move from one bad choice to another is the worst thing you can do.

However, it is preferable to withdraw from the plan if you are happy with the performance of your fund and believe that AMC's flagship scheme's poor performance is what led to the merger.

SEBI’s Prominent Regulations in Case of a Mutual Fund Merger

  1. Investors should be given the option to leave with a 30-day notice period.

  2. To enable investors to make a well-informed decision, the following pertinent information should be provided:
  • The most recent portfolio of the schemes in question.

  •  Information on the financial performance of the aforementioned schemes since they were first implemented, along with comparisons to relevant benchmarks.

  • Details on the new combined scheme's key characteristics, asset allocation, and investment objective.
  • Grounds for allocating new units using a numerical example.
  • Proportions of total non-performing assets and total liquid assets compared to net assets for each scheme and the consolidated scheme.
  • The unitholders' tax consequences of the consolidation.
  • Additional disclosures that the Trustees may require.
  • Additional disclosures that the Board may require.
  1. Investors are not required to pay an exit load if they decide to exit.

What Should You Do in Case of a Mutual Fund Merger?

  • Thoroughly Read the Unitholder Circular

To ensure that the new or transferee scheme will meet your investment goals carefully read all documents associated with mergers and comprehend the merger's impact.

  • Find Out More About the Fresh Portfolio Manager

If a new portfolio manager has been hired, check to see if their investment thesis and past record align with your own.

  • Analyze the Mandate of the New Fund

To determine whether the new mandate meets their investment needs, one must examine the new or transferee scheme's achievement, strategic planning, and investment philosophy.

  • Verify Any Potential Tax Consequences Following the Merger

Read up on the merger's methodology and keep a close eye on any possible tax repercussions.

  • Watch Carefully for Any Fee Adjustments

A vote of the unitholders is necessary before any fee changes are put into effect. To make sure the fund provides decent significance and a lucrative cost structure, clearly state any fee changes.

Conclusion

In conclusion, although the concept of mutual fund mergers is not particularly complex, you still need to proceed with caution. A 30-day notice period is provided to investors so they can weigh their options. They are not required to pay an exit load if they choose to leave. The investor will be responsible for paying any taxes incurred if there are any capital gains at the time of exit.

If they choose to remain and are given transferee scheme units, their holding period will not change for the purposes of calculating capital gains on any subsequent sales. The units' original acquisition date will continue to be valid.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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