• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Aarati Krishnan

WHEN the sponsor (read owner) of your mutual fund decides to throw in the towel, and sell his stake, what should you, as an investor, do? This question is likely to have cropped up often in the minds of Indian mutual fund investors in recent times. More than half a dozen fund houses have seen a change in ownership in the last two years.

Mergers can affect your money

After all, management is the most important factor that you consider while plonking your money in a mutual fund scheme. No question that when a mutual fund changes hands it results in some crucial changes for investors. The fund's asset size may expand or shrink. The star fund manager may quit. The fund may even morph into an entirely new product if the new owner tampers with its investment style, or decides to merge it with his other products.

As an investor, you will have some time to act on an ownership change, before the event. Fund houses are required to intimate investors of any impending change in ownership and provide them with an exit option before the stakes change hands. In certain exceptional situations(see box), it may indeed make sense to pull out when you are offered an exit opportunity.

But don't rush to pull out

But in most cases, it may not be necessary (or even wise!) to reach for the redemption request, at the first indication of an ownership change. For one, the timing of your exit from a fund often determines what you finally make on your investment. So, if a fund's ownership changes hands when the equity market is plumbing the depths, it is certainly not the time to sell your holdings. Also, if you are saving towards a long-term goal, you may not want to pull your money out within a couple of years. Another important reason why you may not want to exit in haste is the lack of investment choices in India. Given that there are not more than four or five funds with a good five-six-year track record, it may not be too easy to find an alternative product that suits your need.

Despite all this, you may have to redeem your investment after an ownership change after taking the following into consideration:

Does the fund manager stay?

In developed markets, investors often follow a fund manager when he leaves one particular fund to join another. In India, fund managers (this may refer to an individual or a team managing the fund) have not yet attained such cult status and one often invests in a fund without knowing who the fund manager is.

But tracking a fund manager change is still important. This is because the investment style that a fund adopts and the stocks and sectors it holds often carry the stamp of the fund manager's personal preferences. After all, it is the fund manager who decides whether he will hold Infosys or Mastek!

When a fund's ownership changes hands, you need to see if the individual or the team which has been managing your fund being taken on board by the new owner.

This is not all. You may also need to track the fund for a while, post takeover, to check if the team is still staying on with the new management.

Style is everything

The fund manager is important, but he alone does not determine the investment style of a fund.

Different fund houses often have different investment philosophies and styles, and they usually like all their products to conform to their way. Therefore, even if the existing manager(s) of your fund move to a new fund house along with your mutual fund scheme, it is no guarantee that your fund will continue to conform to its current investment style. "Style" can manifest itself in many forms.

One fund house may ardently believe in diversification — setting strict 5 per cent limits to each of the stocks in its portfolio. Another may believe in focussed investments — not hesitating to invest even 20 per cent of its assets in just one stock.

The third may bet all by timing its entry and exit in stocks, while a fourth may subscribe to a buy-and-hold policy. When ownership changes, a fund may move from one investment style to another and this can have huge implications for the risk profile and returns generated by the funds making the transition.

It is up to the investors to scan the offer document of the funds after transition to check for any changes in investment objectives or style. Given that offer documents only tell part of the story, even this may not be enough. It may be necessary to run a thorough check on a fund's portfolio to see if you are comfortable with the fund's new avataar.

For instance, when the funds of Pioneer ITI were taken over by the Franklin Templeton group, the latter had an investment style quite different from the former.

While the Pioneer ITI funds were aggressive "growth" investors, the Templeton group's philosophy was "value" investing. Fortunately for investors, there has not been much change in the investment styles of the Pioneer ITI funds after the transition. But this continuity cannot be taken for granted in merger situations.

The devil is in the features

The cost structure of a fund and the charge (load) it imposes on investors entering and exiting is often as important in determining returns as the investment style.

This is especially true of debt-oriented funds. When a fund acquires a new owner, you need to keep track of the changes that the new owner may make to the load structure, the fees that are charged and other features such as minimum investment limits.

Again coming back to the Franklin Templeton group: It increased the entry loads on a range of Pioneer ITI funds after the takeover. Changes in the entry and exit loads and any hike in the management fees charged to the fund directly impact the effective returns that you may earn from your fund.

But sometimes such changes may also be important for the signals they send to an investor. A minimum investment limit of Rs 1,00,000 on a debt fund may suggest that the fund house is targeting corporate rather than small investors. This may not be the right kind of fund for you.

Similarly, when a fund waives entry or exit loads for very large transactions, this also sends that the fund encourages large and institutional investments. Small investors in such funds may actually lose out if the fund sees large investments or withdrawals over a period of time.

How rocky is the transition?

THE need for an investor to track changes in a fund's management, style and features under its new owner, arises only if a fund manages to make a relatively smooth transition to the new owner.

In some cases, it may, indeed, be in the best interests of investors to pull out of their funds at the first whiff of an ownership change.

Do not hesitate to redeem your investment at the first opportunity, in the following situations:

Stories in this Section
Sai Info: Back out

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line