What happens to your mutual funds when there is a fund house takeover?

Your money will remain safe even if your fund house is merged with another one

Kavya Balaji   /   September 14, 2020
Asset Management

Over the past decade, there have been several instances of fund houses exiting their business by selling it to other players. Asset Management Companies (AMC) may decide to shut down for various reasons such as business becoming unprofitable or conflict of interest. In such instances, investors wonder what’s going to happen to their money. So, let’s tell you what happens when a fund house shuts shop.

The details

While theoretically, a fund house can simply return your money at market value when it shuts down, this is not what happens. At the start itself, investors are sent a notice about the AMC shutting down and being taken over by another fund house. This notice will have all the details regarding the entity that is taking over, the date on which the present fund house will cease to exist, finances of the fund house and the exit options available to the investors. Details such as whether the mutual fund schemes will be merged or whether it will be allowed to continue as it is, will be announced too. You can get details on whether the fund managers of the acquired mutual fund will also join the new fund house. So, you need to wait it out till clarity emerges.

What happens to your money?

When you invest in a mutual fund, your money will be in a Trust. This is taken care of by the trustees. Although fund managers handle your money every day, they can’t take it and run away. If a fund house gets acquired, the trust will be taken over too. So, your money will get transferred to the new fund house. There is no need to worry about its safety as the trustees have a fiduciary responsibility to protect your money.

What you should do?

A fund house being taken over is no reason for you to panic. The Securities Exchange Board of India (SEBI) has provided the guidelines for the safety of the investors’ money. So, stay cool and have a look at exit options that the fund house is giving you.

There are obviously two options. One is to exit the funds you hold or to wait for the fund house to be taken over and see how thee fund performs after the takeover.

If you stick around…

Look at the fund house that is taking over and see whether it has a sound track record of management of schemes. Find out if the fund management team is getting merged with the new one or not. If the fund management team is getting integrated with the new fund house’s team, you can enjoy continuity of the fund management along with the best practices of the AMC that is taking over.

Then, you need to see what will happen to your fund. After the takeover, your fund may continue to run or may merge with another fund of the new fund house. If your fund is a popular one, the new fund house’s scheme may be merged with the fund you hold. All of these will depend on the Assets Under Management (AUM) and the performance of your fund. So, you need to understand whether the fund strategy and attributes will change or remain the same. Apart from a likely shift in the investment philosophy of your fund, there may also be changes in the internal processes, risk management practices and, perhaps, even the research capabilities. Note that in some cases, to align the fund with the investment philosophy or product mix of the new fund house, there may be a change in the fundamental attributes of the scheme being taken over. It could be changes in expense ratio, exit load, scheme objectives among others.

When a fund is dissolved, the current value of your investment will be allotted as per the present Net Asset Value (NAV) of the new fund and new units will be allocated. The new units allotted may be more or less depending on the NAV of the fund. However, the investment value will remain the same.

When you want to exit…

If you think that new fund managers will not be able to sustain the present performance. you can choose to move out and invest the proceeds elsewhere. However, if you have invested in a closed-ended fund, or in a fund that has a lock-in, there is not much that you can do until the lock-in period gets over.

You will need to exit within a specified time frame provided by the fund house. You can also exit the fund after this time frame. However, in that case the redemption will have to be done with the new fund house and your fund may be a different one.

Tax implications

If new units are allotted, the date of merger and the cost on that date will be used to calculate capital gains. In case you choose to use the exit option to redeem, you will be taxed based on the type of fund, the holding period and the tax bracket you fall under depending on the scheme.

As an investor, if you are confident about the new fund house, you should give your fund a few quarters to see if it performs. If not, there are plenty of other funds from other AMCs that you can always move to.

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