AMFI board is likely to discuss about consolidation of schemes in its upcoming board meeting. The trade body may ask fund houses to merge schemes with marginal and cosmetic difference, said three chief executive officers on the condition of anonymity. All three CEOs are AMFI board members.
Expressing concerns on increasing number of schemes, SEBI Chairman U K Sinha at a recently held CII MF Summit urged fund houses to consolidate schemes having similar fundamental attributes.
The CEO of a private sector fund house said that AMFI will discuss the possibilities of how to encourage fund houses to merge existing schemes having marginal or cosmetic difference in its forthcoming board meeting.
According to SEBI norms, two schemes can be merged if the fundamental attributes of surviving scheme is not tinkered with. Fund houses are allowed to merge schemes keeping investors’ interests in mind. They have to get an approval by the board members and trustees. Fund houses then file a proposal with SEBI seeking such a merger. After getting an approval, AMCs give an exit option to investors.
Typically, fund managers decide which schemes need to be merged. Usually, non-performing schemes or those which have a small AUM are merged with bigger funds. The shares held by the scheme which is getting merged are transferred to the surviving scheme. This results in increase in the number of units, AUM and the investor base of the surviving scheme.
Budget 2015 has clarified that there will be no tax liability on investors when two schemes are merged. In 2013, the government has reduced securities transaction tax STT from 0.25% to 0.001%. However, the industry has not seen many scheme mergers so far.
There could be a variety of reasons for this reluctance to merge schemes. A fund house may find it difficult to retain existing assets if schemes are merged. For instance, a corporate client who has invested in an institutional plan of liquid fund may not comfortable with retail plan of liquid fund even though the fundamental attributes of both the schemes are similar. Institutional clients may decide to move out since retail schemes carry slightly higher TER.
Secondly, fund houses have a leverage to charge higher expense ratio for small sized funds (scheme merger increases AUM). Finally, if AMCs have too many schemes, the likelihood of a few schemes doing well is high, which helps AMCs promote only the better performing schemes.
Another CEO of a bank promoted fund house is of the view that too many schemes create confusion among distributors and investors. “The government and SEBI have already nudged fund houses to consolidate schemes. Currently, the industry has close to 1,900 schemes. In fact, a few fund houses have three schemes each in the liquid fund and mid & small cap category. This creates confusion even among distributors and investors.”
