Mutual Funds Schemes Mergers: Should Investors Exit Or Not; The Truth Explained

You invest in a fund when you agree with the investment mandate, i.e., how the fund is managed and where all the money is being invested.

You invest in a fund when you agree with the investment mandate, i.e., how the fund is managed and where all the money is being invested. Sometimes, the way a fund is managed is changed completely or to a significant extent, which may be described as a metamorphosis. You may or may not agree with the new mandate and may like to withdraw from the fund.

Change in Sebi rules
The context of significant change in a fund, which is referred to as ‘change of fundamental attribute” in Sebi rules, will become even more relevant in the coming months. As asset management companies (AMCs) with multiple funds with similar mandate go through the process of scheme merger or change in mandate, you will see more of this happening. Be rest assured, the AMC cannot change a fund’s management structure overnight. There is a process to be followed, as per rules.

Let us first look at what all are ‘change of fundamental attribute”: The ‘type’ of a scheme, e.g., open ended / close ended, equity fund / debt fund is a fundamental attribute; The investment pattern, i.e., allocation to equity/debt, minimum /maximum; Liquidity aspects, e.g., redemption.

The process to be followed for building in such a change in the fund is as follows:

A communication about the proposed change to be sent to each unitholder and an advertisement to be given in the newspaper; The unitholders are given an option to exit at the prevailing Net Asset Value without any exit load, for a period of 30 days.

Understand the implication
So much for rules and regulations; AMCs will anyways follow it. The bigger question for you is, what you should do, when you get this communication. You have to go read the mail, cut through the verbosity and get the exact implication of the new parameters and understand how much impact it would have on the management of the fund.

To be noted, the change may be significant from the legal point of view, which requires the AMC to follow the process of sending you a communication and allowing an exit window, but it may not be as significant from the fund management perspective. In such cases, there is no problem in simply continuing with the fund. Even if the change is significant but does not change your asset allocation and remains suitable as per your investment horizon, you need not exit. Only if you disagree with the basic proposition of the fund, you may decide to exit.

Let’s take a few examples. For one, let us say, due to the latest Sebi rule on scheme consolidation, a debt fund is defining the portfolio maturity in the Scheme Information Document (SID) in terms of number of years, which was not defined earlier. Though this may require a communication and offering an exit window, effectively, the fund mandate may not change. In this case, you need not exit.

Second, in a debt fund, the SID mentions an allocation range of 0-30% in money market instruments and 70-100% in debt instruments like bonds. They propose to change the allocation to 0-50% in money market instruments and 50-100% in debt instruments like bonds. Though arguably this change is significant, it only makes the fund more conservative in terms of portfolio maturity. Unless you have a strong reason, you need not exit.
Third, an equity fund is turning from close ended to open ended. This is a reason for you to stay invested, as the liquidity aspect is improving, in case you need to redeem.

Fourth, an equity fund is turning from open ended to close ended. In this case, you need to check the lock-in period and your investment horizon. Only in case of a mismatch, you would need to exit. What is important for you is to understand the new fund positioning. In case of any confusion, you may contact your financial adviser or if you are a direct investor, the AMC personnel.


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