What is a mutual fund merger?

A mutual fund merger takes place when multiple mutual fund schemes or plans come together, creating a new scheme or merging into an existing one. The meaning of a mutual fund merger lies in optimising funds for improved efficiency or regulatory compliance, typically following guidelines set by the Securities and Exchange Board of India (SEBI). A recent example includes the merger involving GIC mutual fund merged with another scheme to streamline its offerings.

Those looking to invest in mutual funds online can use various tools, such as mutual funds SIP calculators, to better understand how their investment could perform under a new or merged scheme structure.

Why do mutual fund mergers happen?

There are several reasons why mutual funds may undergo mergers:

1. Regulatory compliance: SEBI's regulations, introduced to reduce redundancies in the mutual fund market, are one of the main drivers of mutual fund mergers. By streamlining available schemes, investors can find it easier to choose funds aligned with their financial goals.
2. Cost rationalisation: Merging smaller or overlapping funds can lower operational costs for the fund house. This efficiency may ultimately benefit investors by potentially reducing expense ratios and enhancing fund performance.
3. Asset retention: Mutual fund mergers also help AMCs retain assets by consolidating less popular schemes into more successful ones. This approach aims to provide investors with a stable investment option while reducing the likelihood of forced redemptions.
4. Managing redemption pressure: Some AMCs merge funds to manage redemption pressures during market downturns. By consolidating assets, they ensure a larger base, which can help the fund weather temporary market fluctuations.
5. Improving fund performance: Merging an underperforming fund with a more successful one can help improve returns. This move is usually intended to better serve investors by integrating weaker portfolios into more resilient or diversified ones.

How does SEBI regulate mutual fund mergers?

SEBI has set clear rules to ensure that investors are informed and protected during a mutual fund merger:

• 30-day exit option: SEBI mandates that AMCs provide investors with 30 days to exit the fund without an exit load. This allows investors to make decisions aligned with their investment goals.
• Detailed unitholder communication: Investors receive a unitholder circular detailing the merged scheme's portfolio, past performance, and other relevant information, including the reasons for the merger.
• New unit allocation and tax impact: AMCs must disclose how new units will be allocated in the merged scheme, including any tax implications. 

What should investors do in a mutual fund merger?

If you're an investor in a scheme undergoing a mutual fund merger, there are a few key steps to consider:

1. Review the unitholder circular: Carefully go through all documents related to the merger. This information will help you understand the merger's impact and whether the new or merged scheme aligns with your goals.
2. Check the portfolio manager: If the merger introduces a new fund manager, review their past performance and strategy to ensure compatibility with your investment objectives.
3. Understand the new scheme's mandate: Mergers often result in a revised mandate. By analysing the merged fund's mandate, you can analyse if it aligns with your financial goals or not.
4. Evaluate any tax implications: Understand the tax implications of the merger on your holdings. Exiting before the merger may incur capital gains tax, while staying may carry future tax implications based on the holding period.
5. Monitor changes in fees: SEBI requires that any fee adjustments are communicated to unitholders. Fee structures may shift post-merger, so ensure the new fees align with your expectations.

How can investors monitor merged mutual funds?

Investors can monitor their merged mutual funds using tools like the mutual fund SIP calculator. These calculators offer insights into potential returns based on SIP contributions, enabling investors to evaluate the performance of the new scheme. Many online platforms also facilitate investors in tracking changes in performance, fees, and strategy following a mutual fund merger.

Online platforms enabling investors to invest in mutual funds online also offer comprehensive portfolio tracking and tools for comparing different funds. Using these tools, investors can assess how their blended fund fares compared to other options.

Read more: ARN in mutual funds: a comprehensive guide

What should investors consider before exiting a merged mutual fund?

Investors should carefully analyse the benefits and drawbacks before deciding to exit a merged mutual fund. The 30-day exit window without an exit load allows for a thoughtful review of the new fund's strategy, tax implications, and fee structures. If the merged fund's mandate aligns with an investor's long-term goals, staying may offer continued growth and stability, with the added benefit of cost rationalisation from the merger. However, if the new strategy doesn't match an investor's objectives, exiting with a tax-conscious approach may be a better choice.