What if the fund house you are invested in gets taken over?

Over the last couple of years we have seen some major fund houses selling out to other mutual fund AMCs. For example, Reliance AMC acquired the entire AUM of Goldman Sachs MF; HDFC AMC purchased the AUM of Morgan Stanley MF: Kotak Mutual Fund bought the AUM of Pinebridge MF; Birla AMC acquired ING Mutual Fund. More recently, Edelweiss MF is acquiring J P Morgan Mutual fund while DHFL Pramerica is taking over the business of Deutsche AMC in India. While these mergers and acquisitions surely have their synergies, the big question is what should you do as a mutual fund investor? If you are invested in a mutual fund that gets taken over by another AMC, should you stick on to the fund or should you exit. Here are a few key points to guide your decision…

What is the track record of the acquiring AMC?

You may have built a comfort level with your existing mutual fund over the years. When there is a change in ownership, there will be change in strategy and more importantly a change in the fund managers who manage the fund. This is critical for performance. Ensure that the specific fund manager who is going to manage your fund after the merger has a good track record of generating returns without taking undue risks in the market.

Is the core focus of the original scheme being diluted or modified?

When you originally bought a large cap scheme, your idea may have been to introduce an element of diversification into your portfolio. If the new fund manager decides to shift the focus of the fund towards mid-caps, then you need to take a call on whether you want to continue under this new strategy. This is more relevant when you have pigeon-holed the fund against specific goals. In such cases, you obviously cannot afford to accept a large scale change in the objective or strategy of the fund.

Are there some special advantages you will lose out?

This is an important decision point. If you are invested in a foreign owned fund, you may get access to high end and sophisticated research material. This may be helping you in your other investment decisions. When that fund gets acquired by a domestic fund house, you may not continue to have access to such high end research. Then you will have to take a call on whether you want to continue or to shift to another fund.

Remember, the “No exit load” window is for limited period…

As per SEBI regulations, any fund house that gets merged out has to give an exit option to its existing investors without any exit load for a minimum period of 30 days. During this period, existing unit-holders of the acquired entity will be able to exit the fund at the existing NAV without paying any exit load. Remember, today mutual funds charge exit load when you redeem your units before the expiry of one year from the date of purchase.

There is also a capital gains angle to it…

Exit load is one side of the story. The more important aspect is of capital gains tax. In case of equity mutual funds, if you exercise your option to exit the fund then you will have to pay short term capital gains tax if it has been held for less than 1 year. In case of debt funds, you will end up paying peak rates of short term capital gains tax if you have exercised the option to exit the fund before the completion of 3 years from the date of purchase.

A merger is not exactly bad for your fund. Many funds like 20th Century and Zurich AMC got merged into HDFC more than a decade ago. However, these funds have performed astoundingly well after their merger with HDFC. You will have to take a calculated decision in such cases. Ideally, you must exercise the exit option only if you have reasons to believe that the risk is likely to be substantially enhanced or the returns are likely to be diminished. Most of all, do not forget to consider the capital gains tax angle. That is a key factor in your stay versus switch decision.

For all your mutual fund queries SMS ‘ASKMF‘ to 575758 and we will get back to you

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