Fund houses seem to be going slow on merging schemes this year as they adopt a wait-and-watch approach amid an uncertain regulatory environment.
While fund houses merged 46 schemes in calendar year 2011, just six schemes have been merged during the first six months of 2012. The total number of schemes existing at present (excluding FMPs) is 1,328. According to experts, several fund houses have eliminated most of the sectoral themes they thought were not working in 2011 and are now going slow on merging schemes in an uncertain regulatory environment. Most of the schemes merged so far are equity schemes with sectoral themes.
The complexity and logistics of merging schemes ? including informing investors about the merger, giving them a specified exit period and changing the name of the scheme ? is also proving to be a deterrent at a time when most fund houses are looking to cut costs. What?s more, the transfer of equity assets from one scheme to another leads to a securities transaction tax, which has to be paid by the fund house. The current rate of STT charged for mutual funds is 0.25% of the transaction value.
?It (merging schemes) is not an easy process for the manufacturer. A lot of fund houses don?t want to upset the applecart and will look to merge as few schemes as possible,? said Akshay Gupta, managing director and CEO, Peerless MF.
In 2010, market regulator Sebi had brought out guidelines for merger of schemes and had asked fund houses to merge schemes with similar mandates as too many schemes could confuse investors. Although the overall objective of merging schemes is overseen by the market regulator, experts believe investors need to be aware that such mergers may not always happen for the right reason.
?Schemes may be merged if the AUM is not adequate enough to run it profitably,? said the CEO. ?The merger could be a tactic to boost the performance of underperforming schemes,? said Dhruva Chatterji, senior research analyst, Morningstar India. ?The fund house needs to provide a good rationale and adequate disclosures before merging schemes,? he said.
Schemes are merged when the investment and portfolio objectives converge by up to 80%. However, there have been instances when schemes that were merged were not exactly similar. For example, the merger of Franklin FMCG Fund and Franklin Pharma Fund with Franklin India Prima Plus in September 2011 indicates funds with different themes.
Merging schemes is a good way to cut the clutter, say experts.
Fund houses had rushed to launch new fund offers in 2007 and 2008, when the secondary market was on a roll. As many as 322 NFOs were launched in 2007 and another 307 were launched in 2008. That number has subsequently been declining ? 137 in 2009, 116 in 2010, 123 in 2011 and 68 in the first half of 2012 ? as the market regulator tightened norms governing new offers.