Just as one mutual fund (MF) house merges with another, even schemes from within a single MF house can be consolidated.
What is consolidation
Over a period of time, MFs launch several schemes across equity and debt to be able to attract maximum number of investors. Fund houses admit that it’s easier to attract new investors through new fund offers than by marketing existing schemes. However, this practice leads to duplication. Consolidation is a process by which two or similar looking schemes get merged into one. This arrests duplication.
Why does consolidation happen
As a result of launching several schemes over the past decade, many fund houses have two or more schemes that look very similar. Nudged by the capital market regulator, the Securities and Exchange Board of India (Sebi), MFs are now actively rethinking consolidating excess schemes. Having fewer schemes makes sense for the fund houses as fund managers can focus on the remaining few a lot better. It also makes it economical for fund houses to run fewer schemes.
How does it happen
Once the fund house ascertains which schemes need to be merged, it puts a proposal in front of the board of the asset management company (AMC) and the trustees. Once they approve of the plan, the AMC approaches Sebi for its approval. The AMC is supposed to justify its plan and convince the regulator as to why the merger will benefit investors.
Once Sebi approves, the AMC sends a letter to all the unitholders of the merged scheme giving them an exit option. While earlier when unitholders of both the schemes (merged and surviving) were meant to be given an exit option, Sebi modified its rules in October 2010 and said that only unitholders of the merged scheme would need to be given an exit option. Investors are given an exit option of 30 days to withdraw from the scheme. When a scheme merges into another, its fundamental attribute undergoes a change; such investors are given an exit option—typically this lasts for a month—to redeem without paying an exit load.
Unitholders of the surviving scheme (the scheme into which another is merged into) do not get impacted by this change.
Does it happen frequently
It depends. Fund houses such as UTI Asset Management Co. Ltd have periodically merged their schemes, though it still has a large number of schemes within its fold. With Sebi making it easy for MFs to merge schemes, expect to see an increase in scheme merger cases.