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Fidelity Mutual Fund Sale to L&T Mutual Fund

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The mutual fund with an attitude and over . 8,000 crore in assets and 19 lakh customer accounts has quit the game. Fidelity International has sold its stake in FIL Fund Management (the asset management company) to L&T Finance. It entered India in 2005, when Fidelity launched its first equity fund. Fidelity's much-criticised "we-do-not-work-with-IFAs" stance was soon revised, but it refused to publish monthly data like its competitors did, sticking to quarterly disclosures even today. Seven years later, the fund house has decided to call it quits.


Let us start with clearing some basic concepts. What is being sold is the stake of the asset management company (AMC). The investors' money is in the mutual fund, and is secure with the custodians. The price paid and the accumulated losses are all not on the balance sheet of the schemes. Investors will be impacted qualitatively by the transaction, since their trustees and fund managers will change. There is no quantitative impact. The NAV of the funds will continue to be valued based on the market price of what is in the portfolio. There will be no mark-up or mark-down due to this sale.


The new asset manager is L&T Mutual Fund whose sponsor is L&T Finance, a profit-making NBFC. Acquiring Fidelity's mutual fund business is part of the strategy for the group to become large and multi-faceted in the financial services business. The call to take is whether L&T Mutual Fund will deliver performance on the schemes it has acquired. There are three reasons to be cautious on this count. First, the fund house hardly manages . 200 crore of equity funds which are currently not in the top of their league. The debt funds, on the other hand, are doing well. Second, the equity fund managers of Fidelity will handover the management to L&T's newly assembled team, and leave after a period of transition. Investors do not know if the new team will do better, or fail to live up to the expectations. Third, active investors who do not like the uncertainty may leave, making it tough for the fund managers to retain and grow assets.


Investors who do not like the change have the option to quit, without paying exit load. The sale transaction is now pending Sebi approval after which investors in Fidelity's schemes will be given a 30-day notice to quit if they so wish. Those who do not exercise the option will move to the new management. Investors in Fidelity Tax Saver, where a period of three years is not over since investing, will not be able to exit due to mandatory lock-in. They will move into the L&T Tax Saving Fund by default. There are funds that were floated by Fidelity, which were investing abroad, and using feeder funds. Investors in these funds - Fidelity International Opportunities Fund and Fidelity Global Real Assets Fund may be at risk.


The communication from L&T Mutual Fund to investors will specifically indicate which fund will be merged into which one, what the new names will be, and which funds may be closed. Investors in the Fidelity's schemes should ideally await for that communication before deciding on the exit option. Most errors in fund selection are made when investors exit and enter funds in haste and with limited information. Sale of an AMC is a major event, but it should trigger caution, not panic.

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