Mutual Fund Mergers: 3 Crucial Points To Know

By Adhil Shetty | April 19, 2018

Fund houses have been working over SEBI’s new Mutual Fund classification norms. Read on to know what impact this move will have on your MF portfolio.

Mutual Fund Mergers: 3 Crucial Points To Know

Late last year, market regulator SEBI devised a new system for Mutual Fund classification, to bring uniformity to the many schemes in the investment universe today, and demarcate the various options better for the investing community. Equity, Debt, Hybrid as well as solution-oriented funds were part of this classification process, and in all, there are 10 categories for equity funds, 16 for debt funds, 6 for hybrid funds, and 2 apiece for solution-oriented and ‘other’ funds.

Fund houses have been working over these new norms over the past few months. Depending on the nature of the changes involved, you might need to act to rejig your mutual fund portfolio.

Cleaner Portfolio

If you didn’t have one, to begin with, this reclassification exercise provides an excellent opportunity for you to have a cleaner portfolio of mutual funds – with only one fund per category and sub-category. Moreover, all rating portals will have to align with the new system as well, thereby providing a better quality of peer comparison and fund analysis.

In case of Debt Funds, there has been an attempt to define the volatility of their respective NAVs with interest rate fluctuations, quantifying risk in the process. You can use the many categories to select the kind of funds you need.

Fund Size

On occasion, a fund house may have two or more schemes that fall into the same category. To comply with these new norms, it may be forced to merge these schemes into one – increasing the asset size in the process. While this may be of little consequence in case of a debt fund or even a large-cap equity fund, it may affect the liquidity and performance of a small or mid-cap fund.

You are encouraged to explore the specifics behind these changes within each of the affected funds in your portfolio before charting your future course of action with each of them.

Tax Implications

After the budget presented in February 2015, such mutual fund mergers are treated as tax neutral for investors. In addition, fund houses may also provide a window of opportunity for you to exit a scheme without any loads. You should consider doing so particularly in cases where the fund has changed its mandate and such no longer aligns with why you initially decided to invest in the said fund.

Overall, these changes aren’t likely to impact a large number of funds at the end of the day so you can rest assured that there potentially won’t be any large-scale changes needed in your portfolio. Nevertheless, as with any change, do examine its implications and consider all available options before making your move.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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