Merger Schemes by Fund Houses Device to Hide Loopholes

By BankBazaar | May 16, 2012

While investors are worrying about the rate at which mutual fund schemes are disappearing from the surface of the market, you can be assured that there is nothing to fear as mutual fund houses are just merging schemes with each other, that too at much higher rates than what was observed earlier. While nothing may seem erstwhile with this impending trend as funds are merged only with prior permission from the Securities and Exchange Board of India, in regulation with its several rules for the purpose of investor protection, most investors are unfamiliar with this activity and its implications.

First of all, it is important to understand the reason behind investor merger schemes. While the answer may be provocative and shocking to many, it is done for the mere cause of hiding their poor or deplorable performance. This holds true in the case of leading fund houses in the country, as often even they have to come to terms with a failed scheme. The schemes which caused heavy losses to investors are usually those fund schemes, that are built to attract investors for a specified period of time, and with the unpredictable nature of the market, the scheme fell lopsided as the time passed and different types of funds were required to combat the transcending change in the market. Thus, when investors review the lists of schemes held by a fund house, it presents an embarrassing situation for not just the fund house, but also to its customers and prospective investors. Distributors recommend a well-performing fund in the market, and as the prospective investor researches about such a fund on the company’s website, and ends up asking queries on the black marks on such a list, the distributor and the fund house are left with no viable answers. In order to avoid such agitating situations, fund houses merge schemes with another scheme, which has shown better performance and has a comparatively better track record. Investors of such an ill-performing scheme will be given news of the merger, with an option to redeem their funds, or make a transfer to the newly merged fund. In either scenario, the investors are essentially making redemption from their original investment.

Thus, investors would become liable for any form of gains and the capital gains tax that they have incurred. This does not offer any serious hindrance to an investor as the fund that was merged with the better-performing fund might have not even made any profits. Thus, investors do not have to incur any taxes for profits that weren’t even gained. Another issue investors might have to face is the payment of the securities transaction tax or STT on the transactions of the scheme. However, in recent times, it is good to note that when schemes are merged, fund houses usually tend to pick up on the STT charges. One can also note that the activity of merging funds together is similar to the process of a corporate merger, as it essentially involves selling a fund, and making a purchase into another. The value of the investment made by an investor remains constant. However, the net asset value of the scheme and its number of units may undergo some change.  As an investor, it is important that you always stay prudent and prurient to the behavior of your scheme, with respect to market tendencies, as when one of your funds gets merged, it means that you have been careless, since the fund was not drawing any profit, you must have got rid of it a long while ago. If opting for loans like personal loan or a home loan is not on your financial agenda, make sure you make prudent financial decisions.

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