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THE regulatory framework that governs mergers and acquisitions between mutual funds rests on the premise that investors in open-end funds have the power to vote with their feet. All funds are required to intimate any change in management or in the fundamental features of a scheme, to their investors, before the event.

The fund then offers an exit window to all its investors, during which it waives any exit load. Investors unhappy with the change can use this window to liquidate their investments.

But there are actually situations in which investors cannot take advantage of the exit window, though they may like to. This happens when their investments in a fund are under a lock-in period. All tax saving schemes of mutual funds (termed Equity Linked Savings Schemes) stipulate a mandatory three-year lock-in period.

Thus, if a fund changes hands while an investor is still bound by the lock-in period, he may have no choice but to stay with the fund, even if he is actually uncomfortable with the new management.

So when all the funds managed by Pioneer ITI were sold to Franklin Templeton India, it is likely that a portion of investors in the Pioneer ITI Taxshield (the open ended tax saving scheme) had no choice but to move to the new fund house.

A similar situation is likely to arise when the Zurich funds (including Zurich India Taxsaver) migrate to HDFC Mutual Fund. The fund has already notified that the no-load exit window, which opened on April 30, 2003, would not apply to investors who are under a statutory lock-in period.

But it does not appear fair to thrust a management change on investors, just because they have invested in a scheme with a lock-in period. This is a regulatory aspect that SEBI needs to work out, in conjunction with the Income Tax Authorities, if it is to permit M&As between mutual funds.

Maybe fund investors should be allowed to opt out of the lock-in period (and forego the tax benefit) when a tax-saving fund changes hands. In the meantime, the dilemma that arises during M&As is just another reason why investors should think twice about subjecting themselves to a lock-in period on any mutual fund investment.

Aarati Krishnan

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