Consolidation and cost rationalisation are the buzzwords in the mutual fund industry these days. It was waiting to happen. For,the MF industry has often been accused of offering a number of exotic and thematic schemes which mostly ended up confusing the investors and adding to the pile of existing schemes with similar mandates. This trend is slowly changing. A new trend in the mutual fund industry is emerging wherein fund houses are actively merging some of their schemes. The tone was set by the capital market regulator Securities and Exchange Board of India (Sebi) which recently asked the fund houses to increase the minimum target amount to Rs 10 crore in the case of equity schemes and R 20 crore in the case of other schemes. Taking a cue,several fund houses have started merging schemes with smaller assets under management (AUM) with the larger schemes. On top of this,tough equity market conditions are prompting fund houses to take effective cost-cutting measures to ensure they get rid of schemes which have small amounts to manage and remain a burden on the AMCs. The SEBI order It's a problem of plenty in the number of schemes. There is a long list of New Fund Offers launched in the last few years which failed to garner enough investor interest and ended up collecting meagre amounts. To curb this practice,the Sebi recently ordered mutual funds to increase the minimum target amount for equity schemes to R 10 crore and for all other schemes to R 20 crore. Those fund houses that fail to collect the stipulated amount will have to refund the amount collected within 6 weeks,failing which they would have to return money with an interest of 15 per cent to the investors. "For a long time,fund houses thought that it is the only way to do business. that is launch new schemes with different names. Anything less than Rs 10 crore does not make sense even for the fund house. It is a good move for the investors," says Dhirendra Kumar,CEO,Value Research. Merger of schemes The merger mania is catching up. Though the industry was talking about the merger of schemes way back in 2007-2008,nothing significant happened towards that direction. The SEBI came out with a circular on October 22,2010,stating the 'merger or consolidation shall not be seen as change in fundamental attributes of the surviving scheme if two conditions are met: (a) The fundamental attributes of the surviving scheme (which continues to exist after the merger) do not change (b) mutual funds are able to demonstrate that the circumstances merit merger or consolidation of schemes and the interest of the unit holders of surviving scheme is not adversely affected. The pace of consolidation of schemes picked up this year. Several fund houses have already merged or have declared date of merger of their schemes. ICICI Prudential AMC merged ICICI Prudential Fusion Fund,Equity Opportunities Fund,and Fusion Fund - Series III,into ICICI Prudential Dynamic Plan. "The strategies of the schemes were similar and there were a lot of common stocks. Our experience suggested that a fund like Dynamic will perform better in volatile times as well as deliver better risk adjusted returns. Hence,we thought that it will make sense for us to merge the entire Fusion Series with Dynamic Plan",said Nimesh Shah,MD & CEO,ICICI Prudential AMC. Similarly,BNP Paribas mutual fund merged 3 of its schemes into the Equity Fund. "We realised that for the size of our total assets,we had too many schemes. The need of the hour was to merge niche offerings into simpler offerings," said Nikhil Johri,MD,BNP Paribas Mutual Fund. Several other fund houses like IDFC MF,Franklin Templeton MF,Birla Sun Life MF,UTI MF,Kotak AMC and L&T MF have either merged their schemes or are in the process of merger. Cost rationalisation It is not necessarily for the benefit of the investors that the fund houses are on a merger drive. It makes sound business sense for the asset management companies to merge smaller schemes into larger ones. "How will you construct a portfolio with a fund with just few crores as assets under management? A fund manager cannot create a diversified portfolio with such a small fund," adds Dhirendra Kumar. There has been minimal participation by the retail investors in mutual funds in the last one year. After the entry load ban in August 2009,mutual fund companies faced a huge distribution challenge as there were a large number of agents who stopped selling schemes due to lack of incentives. The equity market volatility is creating a serious issue for the fund managers as more the number of schemes,more diverted is their focus. "When the environment becomes challenging,there is a move to cut costs. Merging schemes reduces costs and makes commercial sense for the asset managers. This is the right time for rationalisation as it is not feasible for the AMCs to maintain and run too many schemes," Johri says. Tax liability When a scheme is merged,the taxes and loads applicable are - capital gains,securities transaction tax (STT) and exit load. If an investor has invested in the scheme for less than one year,there is a short-term capital gains tax liability of 15 per cent for an equity scheme. The rate of STT is 0.25 per cent of the transaction value but AMCs are paying this tax for requests of redemption in the 30-day notice,given before the merger of schemes. The exit load is also not applicable during this period. Divyansh Awasthi of Morningstar - India,suggests,"It might be beneficial to investors if the reasoning behind the merger is disclosed.Consolidating similar schemes is one thing,but merger for the sake of hiding below average performance is quite another." There are about 160 equity schemes with less than Rs 100 crore AUM,more than 100 schemes with less than Rs 50 crore as AUM and about 42 schemes with less than Rs 10 crore as AUM. Given the large number of schemes that have negligible AUMs,MF industry has to walk a long road before they have a consolidated offerings for the investors that is easy to understand and helps reduce confusion. ritukantojha@expressindia.com
