Monday, January 15, 2018

What to Do when Your Mutual Fund Merges with Another?

In the last few years, consolidation has occurred within the mutual fund (MF) industry. A question in your mind in the wake of this consolidation may be whether the Indian scenario is becoming difficult for foreign players. Paradoxically, the government is taking several steps to increase the investments in this industry while it is under consolidation.

The last few years have also witnessed an increase in the number of investors in the MFs. However, more than 2,000 active schemes available from the various fund houses make it difficult to shortlist appropriate products to invest in.

Mutual Fund

The Securities and Exchange Board of India (SEBI) is trying to clear the various roadblocks that confuse or discourage potential investors. As per a recent circular, SEBI had instructed asset management companies (AMCs) to consolidate and reclassify various schemes. According to the new guidelines, mutual fund schemes must be classified in the following five categories:
  • Equity
  • Debt
  • Hybrid
  • Solution-oriented
  • Others

These are further divided into various categories as follows:
  • Equity schemes (10 sub-categories)
  • Debt schemes (16 sub-categories) 
  • Hybrid schemes (6 sub-categories) 
  • Solution-oriented schemes (2 sub-categories) 
  • Other schemes (2 sub-categories) 

In the wake of this, several mutual fund investments will have to be merged. SEBI aims to reduce the number of active schemes by as much as 40%. AMCs will be allowed to offer only one scheme under each category. Nonetheless, there would still be over 1,250 schemes after the merger.

The new SEBI rules on the reclassification of MF schemes are applicable only to open-ended schemes. It is anticipated that the new guidelines may not severely affect the existing product portfolio of the various fund houses. Nonetheless, the possibility of scheme mergers is not completely eliminated and some restructuring is expected in the fund houses.

Impact of mergers on your investments

With mergers being inevitable, you most likely would want to know what to do with your mutual fund investments. In the consolidation that has occurred over the last couple of years, it has been observed that foreign players have been acquired by larger domestic fund houses. These are not only some of the largest fund houses but also offer some of the best performing mutual fund schemes. Therefore, it is recommended you invest in schemes offered by these large domestic fund houses.

However, you need to be smart about how to exit your investments if required to avoid large tax liabilities. You must exit from the scheme only during the exit period offered by the fund houses. This ensures you do not have to pay any exit load that reduces your actual returns on investments. However, if you decide to hold on to your investments, it is recommended you seek advice from an experienced tax professional to understand the potential tax implications.

Opting for Systematic Investment Plans (SIPs)

Today, the Sensex is at its all-time high with several companies reaching maximum valuations. If you want to invest in MFs in such a scenario, opting for an SIP is advisable. Your investments will be staggered over a period and will allow you to take advantage of rupee cost averaging. Therefore, the risks due to market volatility and adverse price movements are mitigated when you choose SIPs. When the market conditions become adverse, you are able to accumulate more units and vice versa.

Choosing the right mutual funds

As mentioned earlier, even after the consolidation arising from the reclassification as per the SEBI guidelines, there will be over 1,250 active schemes. Therefore, choosing the best performing mutual funds amongst these may be difficult. Fortunately, you do not need to worry because there are several professional service providers that offer good advice.

One of these service providers is Angel Wealth. The Angel Wealth app has a technology-driven ARQ investment engine. The ARQ investment engine uses highly advanced algorithms and quants to offer the best recommendations. This investment engine considers your personal requirements and risk appetite before offering recommendations. One feature that distinguishes ARQ is that it offers all recommendations without the interference of any human bias. The algorithms use your data to generate recommendations that are appropriate to your investment philosophy.

In the wake of mergers and consolidation in the MF industry, you must adopt a cautious investment approach. You need to clearly understand the investment philosophy and risk profile of the merged schemes. This will enable you to make appropriate investment decisions on whether to exit or stay invested in the different MF schemes. You must not base your decision on size and lineage to ensure the security of your hard-earned monies.

Download the Angel Wealth app and eliminate the risks with ARQ’s advanced machine-originated investment recommendations.


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