Over the past decade, especially after many foreign players entered the Indian mutual fund space, there have been several instances of fund houses calling it quits and exiting their business by selling their business to other players. In such instances, as investors, the first question in your mind would be what’s going to happen to my money? Let us discuss what happens when a fund decides to shut shop and what you should do.
Why fund houses shut shop
Fund houses may decide to shut down for various reasons. Like it is with any other businesses, they may close down because the business is unviable, that is, they are unable to run it as a profitable business. Some of them may also have conflict of interest running this business along with other businesses as per regulations and decide to close their MF unit. Others, especially foreign asset management companies may also decide to take broader business calls and close down businesses in some regions/countries or sell their business at a global level.
Whichever way, as an investor, you need to be rest assured that your money is not going anywhere. It will come back to you or move to the new fund house, if you choose to.
What should investors do?
First, a fund house being taken over is no reason for investors to panic. SEBI, the regulating body, acts as a watchdog for the safety of investors’money and has laid out clear guidelines on the establishment, functioning and shutting down of a mutual fund.
At the outset, investors are sent a notice about a fund house shutting down and being taken over by another mutual fund. This will contain all the details regarding the taking over entity, the date on which the present entity will cease to exist, the state of the funds and the exit options for the investors. In the Indian context, fund houses have always been taken over. Theoretically, it is possible that a fund house simply returns your money at market value when it shuts down. But that has not happened thus far here.
Look who’s buying: Once the announcement of a takeover or merger happens, you need to see which fund house is taking over and whether it has a sound track record of management schemes.
Fund management team: One other thing to watch out for when a fund house is getting taken over is whether the fund management team is getting integrated with the new one or not. The fund management team getting integrated with the new team ensures continuity of the fund management processes which governed the funds being taken over along with the best practices of over the AMC that takes over. If this is not the case then the point we mentioned about the track record of the AMC which is taking over and the new fund manager has to be looked into.
State and future of funds
When such takeovers happen your fund may continue to operate or sometimes merge with another fund. In few cases, the new AMC’s fund may be merged with the fund you hold. All of these, depend on the AUM size and the performance of your fund. In such cases, you need to understand whether the fund strategy and attributes change or remain the same.
Allotment in case of merger:
When one fund is dissolved the current value of the investors’ investment will be subscribed at the current NAV of the existing fund and new units will be allocated. The new units allotted may be more or less depending on the NAV of the existing fund, but the investment value remains the same.
Investors will not have any tax implications in case of any merger of the schemes and subsequently they are allotted units in the merged/surviving scheme.
For the new units allotted, the date of merger and the cost on the date of merger, will be the date to be considered for capital gains purpose
In case investors chose to use the exit option to redeem, they will be taxed based on the type of fund, their holding period and the tax bracket they fall under.
Under all circumstances once the decision on the state of the fund house is finalised, an exit option will always be provided by the fund house within a specified time frame . An investor can also exit the fund even after this time frame. But after the timeframe specified, the redemption will have to be done with the new fund house. Not all takeovers have been successful at the same time not all takeovers have yielded bad results for investors. As an investor, if you are confident about the new fund house, you should give it a few quarters to perform. Otherwise, you have plenty of other schemes from other AMCs that you can always move to, in an open-eneded fund.