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MFs Play Consolidation Game

With equity schemes having fallen out of the mindset of investors, AMCs are looking inward

After the markets started falling from January 2008, investors have been loosing money in equities and the related schemes offered by mutual funds. Understandably, once having burnt their fingers, investors are very reluctant to invest in anything that has to do with equities.

They have a good reason to behave in this manner. Many of the funds that were launched in the later half of 2007 or early 2008 have seen their NAVs fall to almost half of their face value. With their confidence in equities having eroded, new investors are proceeding very cautiously. As a result, mopping up of assets through new scheme launches has become difficult-the maximum assets raised through an NFO (equity scheme) in 2009 has been Rs 33 crore by IDFC India GDP Growth Fund as compared to Rs 5470 crore by Reliance Natural Resources Fund in early 2008. Moreover, from January 31, 2008, fund houses were barred from charging the initial issue expenses to the investors, making it unprofitable for fund houses to keep unveiling new schemes. It has led to a situation where fund houses have shown little interest in launching new equity schemes-just 6 new schemes have been launched this year till date as compared to 38 in 2008 and 30 in 2007 and 2006 each.

It has made fund houses to change their strategy. Fund houses are increasingly shifting their focus away from launching new schemes and instead are concentrating on revamping their existing businesses. Once the fund houses realized that they could not obtain more and more assets from their new-scheme launches, they are making sure that their existing funds are well positioned to capture more assets. The foremost interesting aspect of these changed circumstances is that mergers are being announced and names and categories are being revised for many schemes. The most notable of these changes is taking place at UTI Mutual Fund with Rs 48,750 crore assets under management, which has said that it will combine its various equity schemes-from 28, the number will be reduced to 10. Then there is the case of JM Financial Mutual Fund. By revising the mandate in 3 of its funds in 2009, it looks to be following the same path. For AMCs this is a win-win situation where they can merge poor performing schemes with better performing ones thereby erasing all the previous mistakes. But for the investors, it would be difficult to find out to what extent the merged entity may have compromised itself.

UTI MF - History of Mergers
Scheme  Date  Merged Into
UTI PSU 11/04/2007 UTI Index Select Equity Fund
UTI Large Cap 11/04/2007 UTI Index Select Equity Fund
UTI Brand Value 13/04/2007 UTI MNC
UTI Growth & Value 19/04/2007 UTI Mid Cap Fund
UTI Dynamic Equity 19/04/2007 UTI Mid Cap Fund
UTI India Advantage Equity 19/04/2007 UTI Mid Cap Fund
UTI Software 23/09/2008 UTI Service Industries Fund
UTI Index Select (announced) 21/05/2009 UTI Top 100 Fund
UTI Mastergrowth (announced) 21/05/2009 UTI Top 100 Fund

JM Financial Category Revisions
Old Scheme (category)  Date  New Scheme
JM Equity & Derivative (Arbitrage) 02/02/2009 JM Nifty Plus (Diversified Equity)
JM Healthcare Sector Fund (Sector) 16/04/2009 JM Large Cap (Diversified Equity)
JM Auto Sector Fund (announced) (Sector) 23/05/2009 JM Mid Cap (Diversified Equity)

There is a positive takeaway for investors from this. Earlier, the market was flooded with similar schemes, making it difficult for investors to choose properly. Mergers will simplify the task of investors to select the best fund that suits their interests most.