How To Handle A Mutual Fund Merger

The year 2011 had witnessed a steep rise in the number of mutual fund mergers, wherein a mutual fund house merges its schemes together. This is done for the purposes of hiding the deplorable performance of a mutual fund scheme, or to prevent the retention of its assets or redemption, by merging it with a profitable fund. While there were 58 fund mergers between the years, 64% of these had taken place between the years of 2008-10. The Securities and Exchange Board of India is making several policies to protect investors and foster their growth by rejecting those New Fund Offers or NFOs that possessed investment objectives similar to existing ones. Although mutual fund mergers help in reducing the innumerable fund schemes in the country, these schemes also hold the record of confusing and misguiding investors, without their assent or permission to carry out a merger. An investor, who had initially invested in a scheme, is merely informed about the merger and compliance is almost always expected.

In order to prevent mergers due to the underperformance of a fund, SEBI has issued directives to ensure that when the funds are managed by the same manager, then information on its performance should be publicized and must not be hidden from investors or prospective investors. While mergers are done to put an end to the poor performance of a fund, this does not hold true in all cases as there have been several examples in recent times, where despite a merger, a fund has drawn negative returns. As investors, if your fund is being merged with another for the purpose of unprofitability, then acquire the details pertaining to the scheme, with which your fund will be merged. Do a considerable amount of research to prevent a move from one bad fund to another equally bad one. If however, you feel that your existing fund is doing well, and you are against the idea of a merger as it may hamper the growth of your fund, you are free to walk out of the scheme. If you do not realize this early, you may as well have to pay the price for it by opting for a personal loan or a home loan to finance your requirements.

Thus, as a prudent investor, here a few tips you must keep in mind if your fund is being merged:

1. Before you invest in any fund, conduct sufficient research to make sure you are taking the right decision. After all it is your hard earned money and if you want it to grow for all positive reasons, make sure that you get a good research from primary sources. By primary sources, we mean collecting information directly from financial advisors or market analysts. Gathering information from peers is not banned but it is better not to completely rely since their financial goals and investments, risk appetite will definitely vary from yours.

2. When your fund is being merged, acquire relevant information on the other fund. The fundamentals of any fund that you wish to invest need to be strong and also the mandate of the fund should match with yours. Make sure that your fund manager’s under lying principle is also at par with yours. If the fund manager is tilted more towards greater risk related products and you are a risk averse investor then some major changes are required to be made.

3. If you feel that your existing fund has good growth and developmental prospects and you are not satisfied with the merger, then walk out of the merger and look for better investment options. But make sure that you have carefully analyzed the cost benefit analysis and then arrive at a decision. If you think that a merger may be profitable for you in future, analyze the returns of the fund for a couple of quarters. If they are not up to the laid benchmarks and have underperformed in comparison to the fund’s competitors it is best advised for you to walk out.