How mergers and acquisitions affect your investment

29 August, 2007:

Q: Why should a mutual fund investor be concerned about mergers and acquisitions? Mergers and acquisitions deal mostly with companies, right?

A: Wrong. Even your mutual fund can be involved in mergers and acquisitions. You may remember that recently Birla Sun Life mutual fund acquired assets on Alliance mutual fund. Even before that there have been acquisitions and mergers. An example is the merger of Sun F & C mutual fund with Principal mutual fund. If your fund house is small, it is always vulnerable to acquisitions. Sometime after the acquisition, the new fund always has the choice of merging your scheme with an identical scheme it has. Of course, the choice is entirely left to the fund.

Q: What kind of implication these activities can have on my investments?

A: It can have a major impact on your investments. It can also have tax implications.

Q: Would you explain?

A: For example, the new fund house may be following an investment philosophy that doesn’t match your investment objective. Or, it may have a dubious or lackluster performance record.

Q: You also spoke about tax implications?

A: Yes, if the new fund treats the merger as redemption of old units and purchase of new units, you have to pay capital gains tax. You may also have to incur the new Securities Transaction Tax on equity schemes. The dilemma is you don’t have a choice. Irrespective of your plans, you have to face the tax implication.

Q: What are the other complications that can arise?

A: The character of the scheme can change after merger of the scheme with another one. This happens when the new fund decides to merge a scheme with an identical scheme in its stable. The merger could alter the characteristic of the scheme. For example, the investment approach need not be the same. Also, you may be moving to a costlier scheme. That is why it is imperative that you watch the situation closely.

Q: Are there any regular things one should watch out for?

A: Roughly put, you should always watch out for three things. Firstly, are you moving to a fund house of your liking? You should consider factors likes he past performance, reputation of the fund house in the industry, its investment approach, etc. Two, if there is a case of merger of your scheme with another one, you should satisfy yourself whether the character of the scheme suits you. You should also check where the scheme with which your scheme is merged was a good performer. You should also check out its expense ratio.

Q: What if I don’t like the new fund house?

A: Rush to redeem your units. Of course, consider the tax implications and loads to see whether the timing is right.

Q: As a rule, should one quit a scheme just because it changed hands?

A: Not necessarily. Sometimes, the fund house may choose not to merge the scheme. It may even retain the scheme with its fund managers. In such cases, it would be foolish to rush out because fundamentally nothing has changed with your scheme. The only thing you have to make sure is whether the new fund house imposes its investment approach to the scheme of your choice also.

Q: My fund manager is moving to a new fund. I have been happy with performance for the last three years. Should I follow him?

A: Sure, there can be a lot of shake-ups in the old fund after the acquisition, as the new fund may look to streamline its operations. Your fund manager may have got a better offer and he may be taking it. But that alone need not be a reason to redeem your units and follow him to the other fund house. There is no guarantee that he may hold the same investment approach in the new place, too. Mostly, fund houses set the investment approach, and fund managers roughly follow it. Another reason for discretion is that the new fund house could be a better performer. Consider the performance of a similar scheme, if the new fund has any, over the same period. If it doesn’t satisfy you, you can consider following your fund manager. But take into account the cost factors and taxes before taking the final call.