Mutual Fund Mergers

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THERE are times when investors feel frustrated because their mutual funds fail to perform as expected. They hope that things would turn for the better but as the time passes by, this does not happen. The worse comes when the mutual fund gives up on the investment and the fund house plans to merge two or more schemes so that there is a different investment exposure that arises due to this. This leads to a situation where an overall evaluation is required by investors.

Nature of fund:

One of the key parts of the entire investment is that in many cases, the investor wants a specific exposure and thus looks for a particular fund that can suit their needs. For example, if an investor wants an exposure to the infrastructure sector and hence has chosen a fund from this area then they would like to ensure that the nature of the investment is maintained. If the portfolio changes when the fund is merged with some other fund, then this condition would be violated. Investors would then have to ensure that they change their investment to some other fund that meets their original re quirements. This kind of check becomes necessary otherwise the change might affect the entire nature of their investment.

Possibility of gains:

A factor that is directly impacted by the merger of schemes is the expected return from a particular investment. A merger and a change in the overall portfolio can change the entire condition. It could be that after a long period of stagnation, there is a large rise in the returns that can be earned when the conditions in a particular area or sector get better. However, if the nature of the investment is changed, or the earlier portfolio gets diluted, then the amount that can be earned would not be possible. This will result in a situation where the possibility of the gains is not as expected. So, this becomes a critical factor to consider for investors.

Risk element:

There is a clear link between the risk and the returns that are expected. Usually, investors find that their positions are weakened when they face a risk that is higher than what they had initially expected.

While this could lead to some higher returns, the risk becomes something to worry about. However, when it comes to these kinds of mergers between schemes, then there is a chance that the position has actually reversed, which is also a major cause for concern for every investor.

If an investor is looking at a higher risk element to get the required return, then the change through the new investment could result in a position where the risk is now actually lower. But a lower risk might not always be good if the investor does not desire this and hence, while the investment might look slightly less risky, it would need to be in tune with the requirement of the investor. If this is not being done then the option would be to ensure that the choice in terms of the scheme is changed and that the necessary realignment takes place.

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