What is a Mutual Fund Merger, and How to Handle It?

We are all familiar with mutual funds now that there is so much written about them, and so many funds galore to choose from. However, often you may come across news that 2 or more funds have been merged to become a single fund. This could often be confusing if you have one such fund that is likely to be merged into another fund, leading to this fund being extinguished. There may be umpteen questions plaguing your mind surrounding this news. Here’s some clarity on how to deal with such a situation.

What are mutual funds?

Mutual funds are professionally managed pools of funds where the investors' contributions are invested in the markets as mandated in the scheme information document on their behalf. These mutual funds are invested in securities ranging from stocks, debt instruments, gold, realty projects, specific sectors, etc. Depending on where they are invested, they tend to perform per their respective benchmarks.

Mutual funds remain ideal for individuals who struggle to understand the market dynamics. They may also be individuals who do not have the time to track the markets and their investments to make tactical or strategic changes to ensure their investments perform optimally. Professionals who invest on their behalf carry the onus of outperforming the benchmarks and protecting extreme downsides on the investments on behalf of the investors.

The popularity of this investment avenue is apparent from the fact that there are 44 asset management companies in India. Across all these registered fund houses, there are over 2500 mutual fund schemes. The industry’s AUM stands at Rs. 38.42 trillion as on September 30, 2022.

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Why are mutual funds merged?

Given that the mutual funds and their objectives were all over the place, SEBI took control of the situation to bring consistency among similar funds introduced by various mutual fund houses. They introduced the categories of mutual funds in October 2017. Many of the AMCs at this point had to consolidate their schemes into pre-existing funds or merge similar schemes into a single entity and create a brand-new scheme to ensure that the scheme adhered to the category guidelines provided by SEBI. This drive saw many funds being merged in an unprecedented way. There may be other reasons for fund merger, such as:

1. An effort to rationalize the costs of operation of a fund with low AUM
2. Continued and consistently poor performance of the fund leading to a merger with a fund with a similar or different objective

SEBI regulations concerning the mutual fund merger:

1. Investors will be given a 30-day notice period to undertake appropriate action if any.
2. Providing information to enable investors to make an informed decision, the following information should be made available:
   a. Performance of the schemes proposed to be merged concerning their respective benchmarks.
   b. Details of the new scheme – objective, characteristics, asset allocation, fund manager, etc.
   c. Details of new unit allocation with relevant examples.
   d. Net NPA (non-performing assets) and net liquid assets proportion as compared to the net assets of each of the schemes and the consolidated scheme.
   e. Tax consequences and disclosures as applicable.

How to handle the merger of funds?

As an investor, often you may think that you need not be involved in this process, however, it is your money, and at all points in time, you are required to make informed decisions. Here’s how you can handle a mutual fund merger:

1. Read the fine print

A unitholder circular will be provided ahead of such a merger, which will contain all necessary information to ensure that the new or transferee scheme meets your investment goals. You need to prudently read the documents related to the merger to understand the impact of the merger on your holding.

2. Evaluate the fund manager

The most important aspect of any mutual fund is the fund manager, always checking the credentials of the fund manager, his past track record, and understanding his investment philosophy. This will provide some insight into how the merged fund is likely to steer from hereon. This becomes particularly important if you have been holding an underperforming fund for too long. It could help you decide whether to continue to hold the merged fund or use this opportunity to switch to a better-performing fund.

3. Ensure the new fund aligns with your risk profile and financial goals:

Your initial investment would have been guided by these 2 important factors, your risk profile, and financial goals. Based on the new mandate of the consolidated scheme, the risk parameters and objective of the fund could have changed. To ensure that it continues to suit your requirement, you must understand the new funds' nuances. This will facilitate you to continue your investment journey without any glitches.

4. Be watchful of the fee:

Although the fee is reasonably low and standardized across funds and is closely monitored by SEBI to protect the retail investors' best interest, it is always better to watch how things will change upon the new consolidated fund.

Now that we know all there is to know about fund mergers, there is nothing to fret about. Remember, the cardinal rule in your investment journey is always to make informed decisions.

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