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'MF mergers help investors'

September 16, 2004 14:34 IST

Ravi Mehrotra has done his PGDBM from XLRI and put in a stint at Prime Securities, managing a proprietary equities and bond fund. He was the Senior Vice President and Chief Investment Officer at Kothari Pioneer Mutual Fund, before the latter's merger with Franklin Templeton. Currently he is President of Franklin Templeton.

Post-consolidation of some of Franklin Templeton's schemes, we spoke to Mehrotra for his views on whether mergers add value to the investor and what investors should look at before accepting the terms and conditions of the merger.

Do you think fund mergers/consolidation are more of an exercise to trim the fund's product offerings as opposed to benefiting the existing investors in the fund?

We had undertaken our product rationalization exercise this year with a multi-pronged objective - to eliminate duplication of schemes that had occurred due to the acquisition in 2002, and also to reposition / merge schemes that did not have a long term sustainable proposition from our investors' perspective.

More importantly, we believe that such mergers are in the long-term interest of investors as they result in better economies of scale, and given that the total expense ratio limits are linked to the asset size, the mergers help in reducing the expense ratio. The following examples explain this.

Merging SchemeAs of June 30, 2004Merged SchemeAs of July 30, 2004
Before MergerApplicable
Expense Slab
After MergerApplicable
Expense Slab
(AUM Rs m)(AUM Rs m)
FT India Gilt Fund 1,127.92.00%Templeton India
Govt. Sec. Fund
Franklin India
Balanced Fund
440.52.50%FT India
Balanced Fund

Do mergers add value to investors especially if there is a migration from a diversified equity fund to say a fund of funds?

This would depend on the investor's financial goals and objectives. As far as Franklin Templeton is concerned, we haven't merged any equity fund into a Fund of Fund product.

As mentioned above, we are looking to eliminate duplication and our fund mergers take place wherever the schemes are similar in nature.

Hence, if the migration is into a Fund of Funds scheme, which is more or less similar in construct as that of merging scheme, the investor gets to benefit from the additional advantages that a FOF offers:

  • Access to a portfolio of various top-performing funds, with one investment.

  • Portfolio diversification across asset classes and investment styles.

  • No more worries about which fund to buy and sell FOF does this, automatically, and in a tax efficient manner

We had recently merged FT India PE Ratio Fund and FT India Asset Allocation Fund into FT India Life Stage Fund of Funds and FT India Dynamic PE Ratio Fund of Funds. In both these cases, investors who have chosen not to exit can take advantage of the benefits mentioned above.

Do you think fund houses have been reasonable in highlighting the pros and cons of the merger to the retail investor?

Yes, a clear communication highlighting the reason behind the merger, a comparison between the funds that are being merged, the tax implication of the merger etc. was sent. The communication was approved by SEBI.

Do you believe existing mutual fund regulations are loaded in favour of the fund house and allows them to merge schemes at will?

Given that the current regulations stipulate an exit option without load for investors who are not in favour of the merger, we believe they are fair.

What should the investor consider before deciding to opt/not opt for the merger?

In case of a merger, investors need to keep the investment objective/style of the new scheme and evaluate whether the same fits their financial goals and risk profile.

What are the tax implications of the merger in Templeton's case?

As per the pre-budget provisions of Income Tax Act, investors would be liable for Capital gains/Capital Loss as the case may be. There would however be no tax deducted at source for resident investors. (However, in view of the individual nature of the implications, each investor is advised to consult with their tax advisors).

From a fund house perspective, the alternative to a merger would be closing down the fund, in which case the tax implications would remain the same. In the case of a merger, the investor has an option to either continue the investment or exit at no load.

While the finance minister had recently extended the new capital gains tax structure to equity-oriented mutual fund units as well, we are still awaiting the final clarifications of the applicability of the same.

Mutual Fund units are treated differently for mergers as compared to company shares under the existing tax laws, and the industry has taken up the same through AMFI with the government.

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