The Hindu Business Line : MF scheme mergers leave investors with tax burden

MERGERS of mutual fund schemes are leaving investors with the burden of capital gains tax. With the industry expected to consolidate further, investors are worried about the unanticipated tax outflow that they would be forced to pay.

Unit holders who have invested in a scheme that is being merged have two options: redeem the units and exit the scheme or move to the new scheme.

However, since the units of the old scheme cannot be swapped with that of the new, the asset management company treats the transfer as redemption of old units and fresh purchase of new units. This exposes the investor to the incidence of capital gains tax, no matter what option he exercises.

In two recent mergers of funds, that of Sun F&C with Principal and Franklin Templeton's rationalisation of funds that are in common with those acquired from Kothari Pioneer, investors have been told that the incidence of capital gains tax is to be borne by them.

"I did not ask for my fund to be acquired, it does not seem fair that I have to pay this difference. Also this has come at a time when investment, in equities and mutual funds, is yielding negative returns. This unexpected capital gains tax payment is highly unfair," said Mr Vir Shastri, an investor in Franklin India Balanced Fund.

At Franklin Templeton Asset Management, four schemes — FT India Asset Allocation Fund, FT India Dynamic PE ratio Fund of Funds, FT India Gilt Fund, Franklin Indian Balanced Fund — are being merged with similar funds that the AMC offers.

Similarly, Principal Asset Management Company Ltd merged Sun F&C's Balanced Fund with Principal Balanced Fund. Also, Sun F&C Value Fund and Sun F&C Emerging Technology Fund have been merged with Principal Growth Fund.

While investors prefer their funds to continue as stand-alone funds and not incur capital gains tax, asset management companies claim that rationalisation of funds and merging similar funds have long-term benefits.

"At the time of Franklin Templeton's acquisition of Pioneer, we had announced our intention to reduce product overlaps by merging similar schemes in the portfolio. This product rationalisation exercise was initiated earlier this year, and we believe that it is in the long-term interest of investors: The merger will result in better economies of scale, and given that the total expense ratio limits are linked to the asset size, the mergers will help in reducing the expense ratio over time," said Mr Ravi Mehrotra, Chief Executive Officer, Franklin Templeton AMC.

Fund houses have been announcing dividends in order to bring down the net asset value of the units.

While this helps in decreasing the incidence of capital gains, for most funds it does not eliminate the investors' problem altogether.

According to Mr Ashuthosh Bishnoi, Chief Marketing Officer, UTI AMC, the funds that have been acquired from IL&FS AMC would not be merged with any of UTI's funds.

"We do not want to do anything that would disadvantage the investor. The capital gains tax incidence is one of the reasons that we have decided not to merge the schemes," he said.

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MF scheme mergers leave investors with tax burden