Whenever most of us buy something, one of the selection criteria is the reliability of the brand. We want to make sure that if we need after-sales service, the company will be around to provide that. So it is quite obvious that when we are investing our hard-earned money and that for years, we want to be sure that the scheme and the company will be around to take care of the money.
However, like any other business, Mutual Fund companies and schemes can shut down for a multitude of reasons. Unfortunately, events such as scheme mergers, Mutual Fund House being shut down or sold off cannot be predicted with certainty. But luckily, there are a number of regulations that have been put in place by the industry regulator, the Securities Exchange Board of India (SEBI), to ensure that the shutdown of Fund Houses and merger of schemes happens in an orderly manner. What’s more? These regulations include a number of safeguards that ensure that the money of investors is adequately protected if a Fund House shuts down or a Mutual Fund gets merged.
In this blog, we will discuss key reasons why a Mutual Fund House may decide to shut down, what happens to your investments when a Mutual Fund House exits the business, what to expect when two Mutual Funds of the same Fund House merge as well as how these changes impact you as an investor.
Reasons Why a Mutual Fund Shuts Down
There are 2 common reasons for a Mutual Fund to shut down. The first of these is a decision by a Fund House to exit and sell its business. The second reason is a decision by a Fund House to merge two of its schemes due to any reason
1. Mutual Fund House Shut Down Due to Exit From Business
The decision to exit the Mutual Fund business is one of the most common reasons for a Mutual Fund house to shut down its operations.Over the years, many international and domestic asset management companies have started operations in India. But many of them have decided to exit the Mutual Fund industry and sold their business at a later date. There are 3 ways in which this type of exit happens:
- Scenario 1: Business Sold to Another Fund House
In this scenario, the Fund House that has decided to exit sells its business to another Fund House. After the sale, the schemes operated by the fund house are usually merged with similar schemes of the acquiring fund house. For example, whenbought over Fidelity’s Indian Mutual Fund business, it merged Fidelity India Flexi Gilt Fund into L&T Gilt Fund.
- Scenario 2: Business Sold to Joint Venture Partner
Some Fund Houses in India operate as Joint ventures (JV). In this scenario, one of the JV partners decides to exit the business. The other partner in the JV buys out the stake and takes over the Fund House. An example of this is Nippon buying out the stake of Reliance Capital in Reliance Mutual Fund and renaming the company asNippon India Mutual Fund. In such cases, the existing funds continue to operate after undergoing a change in name. But the key management of the fund house and fund managers of individual schemes mostly remains unchanged, so the operation of the funds is not immediately impacted.
- Scenario 3: Business Sold to A New Entrant in Mutual Fund Industry
In this case, the Fund House sells the company to an entity that is not in the Mutual Fund business. For example, Yes Asset Management, the Mutual Fund business of Yes Bank, was sold to GPL Finance and Investment. In this kind of scenario, the Funds typically continue to operate as is after undergoing a change in name and management.
2. Shut Down of A Mutual Fund Due to Merger of Schemes of Same Fund House
In some cases, a Mutual Fund House may decide to merge two of its ownMutual Fund schemesfor a reason. For instance, a number of such mergers occurred when new rules came into effect in 2018. As per the new rules, fund houses could only have a single Mutual Fund scheme in the categories defined by SEBI.
And since most AMCs had more than one scheme in each category, they had to either merge schemes or make changes in the fund’s investment mandate.
What Happens to Mutual Fund Schemes in Each of the Scenarios?
For each of the above scenarios, there are specific SEBI regulations in place to ensure that the change occurs in an orderly manner and that the interest of investors of the mutual fund being shut down or merged are adequately protected.
In the following sections, we will discuss the key details of how the process works in each scenario.
- Fund House Sells its Business to Another Fund House
When the business of the Fund House exiting from the business is sold to another fund house, the acquiring fund house may decide to close schemes, continue operating the old schemes or merge similar schemes.
If the buying fund house decides to close a Mutual Fund, the existing investors of the scheme will receive a payout from the fund house after deduction of applicable expenses of the fund. This payout will be based on the number of units the investor holds and theNAV (Net Asset Value)of the fund calculated based on the market closing on the final day of operation.
In case, the acquiring fund house decides to continue operating a scheme of the Fund House that was acquired, the investors will be minimally impacted. The scheme will just continue to operate as before after a change in name and a change in scheme Management (if any).
On the other hand, if the acquiring Fund House decides to merge schemes of the Fund House that was acquired with similar funds of its own, investors of the scheme that is being merged are provided the option to exit from the scheme without incurring any exit load.
After the date of the merger, the old scheme will no longer operate and its units will no longer exist. Those who choose to stay invested in the Mutual Fund being shut down after the merger will receive units of the merged fund operated by the acquiring Fund House.
- Fund House Selling its Business to the Joint Venture Partner
When a Fund House is sold to a Joint Venture (JV) partner, the Management of the Fund House, as well as individual Fund Managers, usually remain unchanged. As a result, those who are invested in the schemes are minimally impacted by the sale. The acquiring JV partner will assume complete ownership of the Fund House and change the name of individual schemes, but there is no change in fund management in most cases.
An example of such an exit was the acquisition of the stake of BlackRock in DSP BlackRock Mutual Funds by DSP Investment Managers about 2 years back. After the acquisition, the name of the fund house was changed toDSP Mutual Fund, but the operation and management of individual funds has continued since then without any change.
- Fund House Selling its Business to a New Company
When a Fund House exits by selling its business to a new company that is yet to start its Mutual Fund operations, the initial impact on investors is minimal. This is because the acquiring Fund house will continue operating the old funds of the Fund House that shut down operations. The only change will be a change in the name of the funds and a change in management of the mutual funds.
- How Merger of Two Schemes of the Same Fund House Works
As mentioned earlier, in some cases, a fund house may decide to merge two of its schemes to create a single fund. When this happens, one of the funds is shut down and its assets are added to the assets held by the surviving fund which then operates with merged assets of both the schemes.
An example of this is the merger of Aditya Birla Sun Life Tax Savings Plan with Aditya Birla Sun Life Tax Relief ’96. After the merger, the assets of Aditya Birla Sun Life Tax Savings Plan were merged withAditya Birla Sun Tax Relief ’96which was the surviving scheme. Those who held units of the scheme that was shut down received units of the merged fund in exchange.
In this case, after the date of the merger is announced by the fund house, existing investors of the scheme being shut down are allowed to exit from the Mutual Fund or switch to another scheme of the same Fund House without any exit load. Investors can avail of this exit option for a limited time of up to 30 days after the merger announcement is made.
Alternatively, existing investors of the scheme being shut down can choose to stay invested in the scheme being merged. On choosing to stay invested beyond the merger date, these investors will receive units of the merged scheme in exchange for units of the scheme that was shut down after the merger.
Bottom Line
The shutdown of a Fund House or merger of Mutual Fund schemes that you have invested your hard-earned money in can be worrying. If it does happen, you should consider staying invested in the new Fund for a while to find out how the fund is performing after the merger or under new management. Change isn’t always bad after all. Who knows, the new Fund Manager or the merged fund may turn out to be a better and more consistent performer than the scheme you had originally invested in. And in case, it doesn’t perform as per your expectations, you can always exit the Mutual Fund in favor of a scheme that is a more consistent performer.
