What SEBI’s proposal to categorise and consolidates schemes can mean to you

Post media reports last week, some of you sought to know what would happen to your mutual funds with SEBI’s proposal to reduce the number of schemes. Some of you were also worried as to what will happen to your money. We’d like to brief you on the likely scenarios that will play out if such a move in enacted.

First, on the proposal. SEBI’s mutual fund advisory panel has reportedly recommended strict definitions on how mutual funds need to be categorised. SEBI has also been asking AMCs to have one product under each category and avoid duplication of products within the same category in each AMC. This essentially means 2 things:

• If a fund house had say 2 large caps or 3 diversified equity funds and so on, they may be allowed to have only one in each category.
• SEBI will decide, based on set criteria, whether a fund should be classified as large-cap fund or diversified fund or a income fund or a credit opportunity fund. That means there will be uniformity in classification across AMCs.

The impact of this could be that fund houses either decide to close certain schemes or merge them with similar funds within the same AMC. The former is less likely as fund houses, from a business perspective, will like to retain their assets.

The positive side of such a proposal is that fund houses will sport clearly defined, distinct products thus reducing the problem of plenty from an investor’s perspective. But much of this will depend on how well SEBI defines the criteria for different categories.

The downside to this is that fund houses may be forced to merge several schemes, some of which may not have similar strategies or mandate. For example, a diversified fund could become a large-cap fund or an income fund could become a credit opportunity fund.

What is the impact on you?

First, your money will not be impacted. If your scheme merges with another, you have the choice to redeem your money at the market price (without exit load) and invest in any other fund or accept the merger and move to the new fund offered by the AMC  during the merger period. If you do not act, then your scheme will be automatically merged. If the AMC decides to close down your scheme, your money will be returned to you.

Second, there will be NO tax implication if you go with a merger, provided the merger is between 2 equity or 2 debt schemes and not between the 2 asset classes. Tax laws do not treat mergers as redemption. Your original date of investment (in the scheme that is being merged) will continue to be treated as the investment date for tax purposes. The merger date does not become your date of investment. For example, if you had invested in say an equity fund in September 2015 and it is merged today, your date of investment for tax purposes remains September 2015. You will also be free from tax when you sell the merged scheme even a few months later. In the case of a debt fund, applicable indexation will apply for long-term capital gains.

However, there could be a portfolio strategy impact. If the merged scheme has a different strategy, you will have to reassess whether it will fit you. For example, you may be holding an equity savings fund which merges into a diversified fund or even a balanced fund. The purpose of investing, risk-return metrics, and timeframe would be different for an equity savings fund and a balanced fund or a diversified fund. So holding the new merged fund would not suit your requirements.  Also, the ‘to’ scheme may not have a great performance record. In that case, you will have to see whether the merged scheme will have a new fund manager and whether he/she can improve performance. It is on this front you will need our guidance.

What to do?

For now, there is no announcement of any sort on what SEBI proposes to do. Any action on your part at this point will only end with exit load and taxes for you. Once the categorisation from SEBI is out, and fund houses decide what to do and whether they need to act, they will start announcing changes. This will not be a small exercise and will take fund houses time to enact. We will also keep you posted on what can be done to keep your portfolio strategy intact. For now, relax!