Merger & Acquisition in Mutual Funds

Mutual fund is a mechanism for pooling money by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

In India, a mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. These mutual funds charge a fees - which varies between catetories - like equity,debt,hybrid and asset size. As the Asset Under Management (AUM) grows, so grows the profits of the AMC.

Usually, a well performing mutual fund scheme attracts lots of attention and as the confidence grows among investing community, more and more money is invested. This may be called as ORGANIC GROWTH.

But there is a back door entry to grow your assets – by M&M – which may be referred as INORGANIC GROWTH. Some of the reasons for an AMC to exit / acquire another AMC is listed below:

The reason for an Asset Management company to sell could be:

1.                   Lack of vision / confidence to grow their AMC business

2.                   Promoters of AMC wish to exit – to re-focus on their core business

3.                   Change of Leadership of AMC / Promoter – Change in priority

4.                   Regulatory constraints – due to some other global acquisition, forcing them to exit AMC business in India

5.                  Pocket a Profit for the assets they have grown over years.

The reason for an AMC to acquire could be:

1.       Grow assets faster.
2.       Acquire more clients / investors folios – though at a cost (premium)
3.       As size grows – with cost of operations being fixed, their profit grows
4.       Acquire Talent – Fund management team 

Positive side of AMC M&A:

• A new owner means – fresh breath of air. The acquired AMC gets a new lease of life.                  They can get back to board room and thing of ways and means of growing their business with fresh resources. Restructuring can help better performance
• Acquiring an AMC is like buying a big plantation – which has been grown and       groomed for years. Since it takes time to bring a plantation to productive phase, acquiring a mature plantation can give yields from DAY ONE.

Negative side of AMC M&A:

• 1.     Since SEBI (market regulator) says a mutual fund can have only one scheme in each category – like largecap, midcap etc, due to M&A it is more likely that each category may he duplicate of schemes. As a result one is merged with another – leading to confusion like SIP stopping, NAV calculations, swap in number of units etc. Investors face music from their auditors at the time of redemption from these schemes.
• 2.       In M&A if the best talent is retained, it is well and good. But sometimes the fund management exits – as in the case of Fidelity MF. If an investor had invested, believing in the fund managements ability, these exits of fund management talent could be a strong reason to exit from the scheme.
• 3.       Just as in marriage, where in the bride undergoes a cultural shock in the new environment – Each AMC has got a culture. During M&A, they have no option but to adopt to the new culture. Sometimes this works against the team spirit, unless the acquiring company (bridegroom’s family) is more accommodative.
• 4.       While these mutual funds do release public notice on the schemes which are merged, renamed and the change in fund management team, investing public often donot get a clue on whether these changes are good or bad for their investments.

Apart from AMC mergers, scheme mergers – mostly due to regulator’s instructions have been happening every now and then. For instance the recent re-categorization of mutual fund schemes led to mass overhauling of mutual fund schemes which left many investors perplexed. If it is just a renaming of the scheme – with number of units and unit price remaining the same, it is easier to understand. But sometimes there is a swap ratio between mutual fund schemes, like HDFC Prudence (Hybrid Fund) and HDFC Growth fund (Equity Fund) merged to a new fund called HDFC Balanced Advantage Fund (Asset Allocation Fund) with new NAV, it often results in accounting confusions.

Now as an Investor, what should we do – Stay invested / Exit / Invest More in these M&A Schemes:

• 1.   Check if the scheme you are holding remains the same – in the sense the investment rational, logic, benchmark, category and above all the fund management – remains the same. If so, need not worry. You can continue to hold / invest more. Else, check if the new avatar is ok with your thought process and expectations. If there is a scheme merger, then you need to ensure if the new scheme’s classifications are as per your investment thesis.
• 2.       Keep a tight watch on your investments in these ‘acquired’ schemes – regarding their performance. Do attend to the commentaries / concalls/ notes of these fund managers to ensure your investments are in the right path.

Two such M&A's are happening in recent times. Principal mutual fund's acquisition by Sundaram Mutual Fund has already been completed by 1st Jan 2022. HSBC Mutual funds acquisition of L&T mutual fund is under process.

To put it in a nutshell, you as an investor and me as a distributor don’t have any say in the M&A activities. All we can do is take stock of the situation and act according to the outcome.