Fund houses merge schemes to save overhead costs

Simplify choice, offer better clarity for investors.

Fund houses are merging their less successful schemes with the more robust ones, ridding themselves of what werereduced to a clutter in the current market. In the process, they have saved overhead costs.
In July, Kotak Mutual Fund, Principal Pnb Mutual Fund and Fidelity Mutual Fund merged some of their select schemes into their much larger schemes. Some of the other fund houses to have merged schemes in the recent past are UTI Mutual Fund, JM Financial Fund and ING Mutual Fund.
Merging schemes helps the fund houses bring down costs and manage funds better, said Mr Dhirendra Kumar, Chief Executive Officer of Value Research.
Sometimes schemes are so similar that it amounts to duplication, and it makes economic sense for AMCs to merge them and simplify matters.
Both Principal’s JuniorCap and Emerging Bluechip, which were merged, are mid-cap funds and had similar objectives and mandates, said Mr Rajat Jain, Chief Information Officer of Principal Pnb Mutual Fund.

Better choices

The investor either has the choice to exit the scheme which is being closed or opt to accept fresh units of the scheme into which it is being merged. Also, according to a notice of one fund house, the transaction of getting new fresh units would be considered as redemption from the scheme which is being merged and may entail capital gain or capital loss and securities transaction tax.
For the investor this simplifies choice and offers better clarity, said a fund manager.
The recent fund mergers have seen Kotak Technology fund, Kotak MNC and Kotak Global India being merged with Kotak Opportunities; while Principal JuniorCap was merged with Principal Emerging Bluechip fund.

Open plans

In the debt category, two plans of Principal Child Benefit Fund, (an open-ended balanced scheme) were merged; two plans of the Principal Government Securities Fund, (an open-ended dedicated gilt scheme) were merged; while Fidelity Multi Manager Cash was merged with Fidelity Cash Fund. Sometimes mergers happen as there are some schemes whose mandate does not allow them to participate in a diversified range of stocks, said Mr Krishna Sanghvi, Head of Equities at Kotak Mutual Fund.
Some schemes have specific mandates which in the current market environment do not give returns, explained another fund manager. For example, a sector-specific fund will not do well if the respective sectoral stocks are not faring well.

Size that matters

According to some fund managers, the small size of a scheme could also lead to its merger with another.
According to Value Research data, Kotak Tech had a fund size of Rs 18.74 crore, Kotak MNC Rs 26.70 crore, and Kotak Global India, Rs 51.48 crore as at June end, while Kotak Opportunities (into which these were merged) had a fund size of Rs 903.48 crore.
Principal Junior Cap had a fund size of Rs 53 crore, while Principal Emerging Blue Chip Fund stood at Rs 71 crore as on June end. In some cases, the merger of schemes helps asset management companies to gracefully exit from a scheme which is not performing well by extinguishing it through merger with a better performing one.

Source: http://www.thehindubusinessline.com/2009/07/24/stories/2009072451701200.htm