Mutual fund merger refers to the combination of two or more mutual funds into a single fund by creating the new mutual fund in order to acquire or accept the transfer of the assets, rights, and obligations of the previous funds, which are subsequently dissolved.
In order to create consistency across comparable schemes established by the various mutual fund houses, SEBI announced new and wide categories for mutual funds in October 2017. Therefore, many AMCs have either merged their scheme into some existing scheme or combined with another existing scheme to establish a new scheme in order to comply with the SEBI's criteria.
However, amid this, there can be a very common question among the investors about what should they do in such a situation. Let us try to discuss what can be done.
A fund company may combine projects in addition to combining comparable schemes to achieve economies of scale or to kill off schemes with a poor track record. A program with a limited corpus size may be more expensive to run than it is likely to earn in fees. As a result, fund firms frequently combine unsuccessful investment ideas with other, frequently more well-known schemes.
Regardless of whether the schemes are being combined with one that have a comparable investment aim, evaluate the existing scheme attentively. Even though fund mergers are often done in the benefit of investors, the surviving scheme may not necessarily be right for you.
Whether it's strategic schemes like counter funds or themed funds, fund firms frequently introduce schemes when a certain element is in trend. Between 2006 and 2007, when the infrastructure sector seemed promising, there was a frenzy of infrastructure funding. But after the financial crisis, this was one of the least performing industries. Such systems were combined with other schemes in an effort to conceal the appalling performance.
This does not necessarily imply that the system that survived is the finest of its kind. Review the performance to see whether the plan has regularly outperformed its benchmark if the investment aim is in accordance with your goals, and then decide on a suitable investment strategy if it is.
If your fund is being combined because it is underperforming, you need to learn more about the plan into which it is being merged. Letting your money go from one terrible choice to another is the worst thing you can do. However, it is preferable to withdraw from the plan if you are happy with the performance of your fund and believe that the AMC's flagship scheme's poor performance is what led to the merger.
Even if the idea of merging mutual funds is not very complicated, you should nonetheless act with caution. Investors are given a 30-day notice period to consider their choices. If they decide to leave, they are not forced to pay an exit load. Their holding term will not vary for the purposes of computing capital gains on any subsequent sales if they decide to stay and are allocated transferee scheme units.