The number of mutual fund schemes getting merged has increased following a reduction in the securities transaction tax (STT) in June this year.
Seven fund houses have merged 13 funds since June this year, Value Research data show. LIC Nomura has merged five schemes, whereas Reliance MF and Birla Sun Life MF have merged two schemes each.
While 46 schemes were merged in calendar year 2011 and 22 in 2012. Just two schemes were merged this year prior to June.
“Now that securities transaction tax has been reduced, it is much more feasible for a fund house to go ahead with scheme mergers,” said Dhruva Chatterji, senior investment consultant, Morningstar India.
The transfer of equity assets from one scheme to another leads to a securities transaction tax, which has to be paid by the fund house. STT was reduced to 0.001% since June 1, 2013 from 0.25% earlier. The reduction in STT will lead to significant cost reduction for fund houses merging schemes. For instance, securities transaction tax for an AUM of R1,000 crore will now work out to R1 lakh as opposed to R2.5 crore earlier.
Apart from STT, the complexity and logistics of merging schemes — including informing investors about the merger, giving them a specified exit period and changing the name of the scheme — have been a deterrent for scheme mergers so far, said experts.
According to Chatterji, fund houses are resorting to scheme mergers primarily to reduce the clutter in their portfolio as they have been under pressure from the market regulator to do away with schemes with similar themes. In 2010, market regulator Sebi had brought out guidelines for merger of schemes and had asked fund houses to merge schemes with similar mandates as too many schemes could confuse investors. Thirteen schemes were merged in 2010.
However, Chatterji points that fund houses may not only choose to merge schemes on similar themes. A case in point is the recent merger of Reliance Natural Resources Retail (a thematic fund) with Reliance Vision (a large & mid-cap fund).
Although the overall objective of merging schemes is overseen by the market regulator, experts believe investors need to be aware that such mergers may not always happen for the right reason. For instance, mergers could be a way of doing away with underperforming schemes.
Fund houses had introduced several schemes with similar objectives or themes during