Kotak Mutual Fund has announced the merger of the Kotak World Gold Fund and Kotak US Equity Fund into a third scheme investing in emerging markets. Kotak World Gold Fund invests in gold mining companies around the world and was launched in June 2008. Kotak US Equity Fund was launched in December 2013 and invests in the US market. The two will be merged into Kotak Global Emerging Market Fund. The merger will go into effect on 26th February.
The two schemes have delivered highly varied returns over their existence. Kotak World Gold Fund has delivered a CAGR return of just 0.44% since inception (as of 7th Feb, 2020) and has seen its AUM dwindle to ₹50 crore. Kotak US Equity Fund on the other hand has delivered a healthy 10.91% since inception. However its AUM is also extremely low at just ₹13 crore. Kotak Global Emerging Market Fund was launched in September 2007 and has a return since launch of 4.43%. However all three schemes have rallied strongly over the past year. The 1 year returns of the Gold, US Equity and Emerging Markets funds stand at 27.21%, 17.22% and 13.32% respectively.
According to the notice issued by Kotak Mutual Fund, investors can exit the scheme without paying exit load by 25th February. However such an exit can attract capital gains tax, for anyone with unrealised gains in the schemes.
“The Gold and US equity funds are feeder funds into global funds. Their AUMs didn’t scale up despite decent performance," said Nilesh Shah, CEO, Kotak Mutual Fund. “Both the global funds have increased lot size for investment as well as redemptions. Due to the smaller size of the Gold and US Equity Fund we would have to keep a reasonable portion of the funds in cash due to increased lot size, Maintaining higher cash balance will not be in accordance with the objective of the scheme," he added. Shah also defended the merger into a third scheme with a completely different objective. “Since unit holders in these funds wanted global exposure with respect to US equity and Gold, we are offering global emerging market as an alternative," he added.
“Investors should generally avoid debt and international schemes with AUM below ₹50 crore. There is a high risk of such schemes being wound up or merged with completely different funds and can impact asset allocation too," said Nishith Baldevdas, a Chennai based Registered Investment Advisor (RIA).