The Securities and Exchange Board of India (SEBI) has been working hard to safeguard investors’ interest. The most recent issue on its agenda seems to be the merger of similar schemes with identical investment objectives and portfolio preferences. SEBI has made earnest requests to mutual fund houses in this regard at various platforms in the past. But mutual fund houses have continued to turn a deaf ear to these informal requests. On the contrary, they continued to launch New Fund Offers (NFOs) and grow their Assets Under Management (AUM) in the same old lackadaisical way.

Taking notice of this blatant disregard by the industry, SEBI has taken out its rule book to reprimand mutual fund houses. As per the latest media reports, the capital market regulator is likely to introduce rules making it mandatory for mutual fund houses to merge schemes with similar features. "Mutual funds have not responded to SEBI’s persuasion for years. So, now it has decided to come out with the rules," a person familiar with the development said in an informal conversation with the media.

An advisory committee appointed by SEBI is expected to meet in September to eliminate the unwanted glut from the shelves of mutual fund houses. They have been of the view that, identical options create unnecessary confusion in the minds of investors, which eventually deters them from investing in mutual funds. This is more relevant in India’s context since the awareness is still shallow.   

What is the impact of this development on mutual fund houses?

Commenting on the possibility of a merger of similar mutual fund schemes, Mr Manoj Nagpal, chief executive, Outlook Asia Capital, an investment advisor said, "Mutual funds do not really benefit from consolidation. The probability of one scheme doing better than a similar one at any point always works for the mutual fund." 

Another view is, since the corpus under one scheme can swell due to the merger, some schemes could see a huge jump in their Assets Under Management (AUM). This may affect the expense ratio of such schemes. Sharing his view on this, Mr Nagpal said, "At some stage, bigger schemes will have to bring down their expense ratio. This will impact their profitability." Fund houses deduct a certain percentage of your investments towards managing your money and offering other services. This includes expenses as well as their profit. SEBI has already prescribed limits on the expense ratio a fund house can charge its investors.

Any impact on investors?

When two schemes of the same fund house or from different fund houses get merged, there’s no tax implication. Moreover, the Union Budget 2017-18 clarified that transition from merging schemes to the surviving scheme will be considered as a continued investment. This is done to ensure that tax provisions for short-term capital gains don’t create roadblocks for the merger of schemes.

For example, if you invested in scheme ‘A’ on January 01, 2016 and it was merged with the scheme ‘B’ on June 01, 2016; then your investments in scheme ‘B’ (surviving scheme) will be considered as the continuous investment and holding period for the purpose of  taxation would be calculated from January 01, 2016 and not from June 01, 2016. Furthermore, the original cost will be considered as a base to determine the quantum of profit and not the cost at the time of the merger.

What should investors do?

Logically, mutual funds will merge non-performing schemes with similar performing schemes. This is because from a marketing perspective, they need popular schemes to survive and continue to do well. Therefore, it’s likely that such mergers will be beneficial for investors.  Nevertheless, you have to assess the performance, expense ratio, and risk profile of the schemes at the time of merger just to be safe. Post-merger, you should continue to monitor the performance of the fund closely.  

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