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Fund scheme mergers: Look deeper

If your mutual fund scheme is being merged, should you stay put?

Fund houses are looking at clubbing some of the existing schemes with similar features to trim their offerings. To support such a move, the market regulator, the Securities and Exchange Board of India (SEBI), has recently come out with a circular easing the merger norms of mutual fund schemes. Since January 2010, six fund houses have merged schemes from within their stable. The table shows some of the major mergers.

ICICI Prudential Mutual Fund merged its ICICI Prudential Fusion Fund, ICICI Prudential Equity Opportunities Fund (IPEOF; formerly known as ICICI Prudential Fusion Fund Series-II) and ICICI Prudential Fusion Fund Series-III into ICICI Prudential Dynamic Fund (IPDF). UTI Mutual Fund merged UTI Variable Investment Scheme-ILP with UTI Balanced Fund and UTI Infrastructure Advantage Fund–Series–I will be merged into UTI Infrastructure Fund, JM Financial Mutual Fund merged its seven schemes into three: JM Agri & Infra and JM HI FI were merged into JM Basic Fund. JM Financial Services Sector Fund, JM Telecom Sector Fund and JM Large Cap Fund were merged into JM Equity Fund. JM Contra, JM Mid Cap and JM Small & Mid Cap were merged into JM Multi Strategy Fund.

If you find that the scheme you are holding is getting merged, should you exit or stay invested in the merged scheme?

Firstly, we should understand the reasons for these mergers. Mergers of schemes usually take place due to three reasons. One, fund houses look at merging schemes when their investment objectives overlap, leading to confusion among customers and distributors. Fund houses find themselves saddled with too many schemes in a bear market or a sideways market, if they have had launched too many new schemes during the previous bull market. Two, schemes are merged when there is continuous underperformance. Poor performance could be the result of sheer mismanagement which is why JM is merging so many schemes. Or it could also be caused by too many NFOs (new fund offers) launched during the bull market. While fund companies launched a flurry of new schemes during 2006-2008, timed with the stock market boom, the years thereafter saw fewer new launches. According to Mutual Funds India, a data provider on Indian mutual funds, in 2007 and 2008, 113 and 112 equity diversified (including index and sector) schemes were launched, respectively. The number of new equity diversified (including index and sector) schemes came down in 2009 to 78 and to 46 in 2010. In 2011, six schemes under the same category have been launched till the end of March.

Three, schemes are also merged if the corpus is too small. In the case of ICICI Prudential, the corpus of the three funds put together aggregated Rs1,100 crore and the assets under management (AUM) of the target fund stood at Rs3,000 crore.

Track record
To decide whether you should stay put when schemes are being merged, figure out which of the three reasons is applicable. Start with the historical performance of the target scheme as well as the overall performance of the fund house. In our Cover Story this time, we have ranked fund houses on the basis of the above-mentioned three factors and the downside risk, i.e., the Sortino ratio. If the fund house going for the merger is among the top performers and is only consolidating its asset size, then one can choose to stay invested in the particular fund house after the merger. But if the fund house is among the laggards, then you had no business to invest in its scheme in the first place. Don’t assume that the merged scheme will suddenly start doing better, especially if the fund manager has not changed.

Very simply, since you are already stuck with a fundamentally poorly-performing scheme, even mergers of schemes would not make much difference. The best option is to take a ‘sell’ call and shift your money to a better quality scheme. JM Financial Mutual Fund comes last in the list of fund houses virtually in any kind of study. In our Cover Story too, it scores lowest in our ranking of fund houses. Seven of its schemes being merged into three would hardly make any difference to their overall performance. So, the best option is to take an exit route.

Historically, fund houses which do not perform well, on the whole, go for mergers of their schemes. The merger is mainly done to reduce their cost of operations as well as to club the underperforming schemes with the better performing schemes to boost the performance of the fund house as a whole. It also helps them erase their poor track record. Notice that among the three fund houses putting through the mergers, there is no Reliance Mutual Fund or HDFC Mutual Fund. There is JM and UTI which are lagging fund houses. ICICI Prudential is an exception to this rule. It is not effecting a merger to hide poor performance.


Give public offer discounts at bidding time: SEBI

The new rules, which mandate discount being given at the time of bidding for initial or follow-on public offers, would be applicable on public offer documents filed on or after 15 June 2011

New Delhi: Investors eligible for share price discounts in public offers would now get this benefit at the time of their bids, as against the current practice of such discounts being given at the time of share allotment, reports PTI.

In a circular issued to the stock exchanges, merchant bankers and other entities associated with public offers, market regulator Securities and Exchange Board of India (SEBI) has expressed its concern over the current practice as investors lose on the benefits like lower cash outgo and possible eligibility for more shares.

SEBI said the new rules, which mandate discount being given at the time of bidding for initial or follow-on public offers (IPOs/FPOs), would be applicable on public offer documents filed on or after 15 June 2011.

Generally, retail investors and employees of the companies launching public offers get a discount of about 5% in the price of the shares being sold in IPOs and FPOs.

Retail investors are allowed to bid for shares worth Rs2 lakh in a public offer, but non-applicability of the discount at the time of bidding could lead to them getting less than the allowed quota of shares.

“It has been observed that presently, the effect of such differential pricing, if any, in a public issue, is being given to the eligible investors only at the stage of allotment of specified securities and not at the time of filing an application for such allotment,” SEBI said.

“This takes away certain benefits from the investors such as lower cash outflow at a price net of discount, the ability to apply for more shares with the same cash outlay, etc,” it added.

“In order to address the aforesaid issue, it has been decided to allow investors eligible for differential pricing in public issues to make payment at a price net of discount, if any, at the time of bidding itself,” SEBI said.

In this regard, SEBI has asked merchant bankers to ensure appropriate disclosures in offer documents and application forms to the effect that investors eligible for discount can make payment after adjusting the discount, if any.

“It shall be disclosed that such investors shall in the relevant column indicate the bid price before adjusting for discount, if any,” SEBI said.

SEBI has also favoured discount being mentioned in absolute rupee terms for the ease of calculation by investors eligible for differential pricing.

The market watchdog has also asked the stock exchanges and other market entities to effect necessary changes in their systems for the new mechanism.


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