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What to look for when mutual Fund Schemes Merge?

Where there is a will there is a way seems to be the proverb of the season. The SEBI has made its discomfort obvious to asset management companies queuing up for necessary clearances to launch new funds. With very less difference between several offerings from the same fund house, the market regulator has cracked the whip on AMCs and is selective in approving new funds.

 

Fund houses are taking the cue and looking at clubbing some of the existing funds with similar features to trim its operations. To support such a move, Sebi has recently came out with a circular easing the merger norms of mutual fund schemes. In the earlier norms, any merger of schemes was viewed as change in the fundamental attributes of the surviving scheme and hence it was mandatory for fund houses to follow certain procedures laid down by the regulator in this regard.

 

This entailed mutual funds to send letters to each unit holders of the schemes to be merged disclosing all relevant information on the investment objective, asset allocation and the main features of the new consolidated scheme; basis of allocation of new units by way of a numerical illustration; percentage of total NPAs and percentage of total illiquid assets to net assets of the individual schemes as well as in the consolidated scheme and the tax impact of the consolidation of schemes on the unit holders.

 

Moreover, AMCs were required to give the unit holders the option to exit the schemes to be merged at their prevailing NAVs without exit load. In its new circular, Sebi has made merger procedures less tedious and allow more schemes with almost similar features to be merged or consolidated. Further, the circular says that the merger or consolidation would not necessarily mean change in fundamental attributes of the surviving scheme if there are no changes in the features of the surviving scheme if the fund house is able to establish that unit holders' interest is not adversely affected by the merger. Therefore, a fund house is not required to offer exit option to the investors of the existing scheme.

 

Simply put, if scheme A is merged with scheme B of the same fund house; after the merger only scheme B will exist. If there is no change in any of the fundamental features such as investment objective, asset allocation of scheme B, then the fund house need not offer an exit option to investors. However, the fund house has to offer exit option to unit holders in scheme A and inform unit holders in both the schemes tall relevant information.

 

SEBI wants fund houses to merge similar kind of schemes so as to reduce the number of schemes run by fund houses and the recent circular is move towards this larger goal. There are 254 equity diversified funds, excluding 48 tax-saving funds, besides index and sector funds as on October 31, 2010. That's too many funds for not so many retail investors. This move is a clear reminder to fund houses that it's time to streamline their product portfolio and clear the mess they created with the NFO frenzy in the past.

 


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