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Obliterating non-performers

Reliance Mutual Fund recently merged two of its non-performing funds into bigger schemes, which has unsettled investors in the surviving schemes

Earlier in August, Reliance Mutual Fund announced the merger of Reliance Natural Resources Fund into Reliance Vision and Reliance Infrastructure Fund into Reliance Diversified Power Sector Fund. Since the announcement, investors of each fund have flooded our inbox with queries about the fate of their investments.

The merger of Reliance Natural Resources fund with its assets of Rs 1,182 crore will make Reliance Vision a Rs 2,744 crore fund. Reliance Natural Resource raised Rs 5,660 crore at its launch just before the market collapse in January 2008. In a hostile market so far, the fund has failed to deliver any meaningful return with its NAV at Rs 7.53. The outlook too remains grim. Investors have already withdrawn nearly 73 per cent of their money. With this merger, investors of Reliance Natural Resources funds will attain greater diversification in Reliance Vision, a large and mid cap fund.

On the other hand, Reliance Infrastructure, despite being a late entrant, was lucky with its collection of Rs 2,350 crore during its launch in June 2009. Since then infrastructure funds have been completely out of favour. Its current NAV stands at Rs 4.27 and 63 per cent of the investors have already pulled out of the fund.

However, the merger of the Infrastructure fund with Diversified Power Sector fund is unlikely to bring cheer to the investors. The Diversified Power Sector fund is also in rough weather for a few years now and has a narrower investable universe compared to an infrastructure fund. With this merger, Reliance Diversified Power Sector fund will have Rs 1,949 crore in assets and investors’ hope will rest on the turnaround in the power sector.

But nonetheless, Reliance Capital AMC will be able to bury its most embarrassing fund.These mergers could well be the start of companies rushing to bury their duds.

Why are funds merging?
* The great stock market boom of last decade was fuelled by NFOs. Most NFOs struggled to meet investors’ high expectation after the crisis of 2008
* Sectoral funds have lost their lure completely with few notable performance in last few years
Reduced STT is a great incentive for AMCs to do away with dud funds and at the same time further swell the assets of * well performing funds

This year’s Union Budget drastically cut the securities transaction Tax (STT) on redemption of mutual funds from 0.25 per cent to just 0.001 per cent post June 1, 2013. Post cut-off, it has paved the way for AMCs to freely merge their different schemes, and in the process also do away with non-performers.

Reliance Capital has become the first AMC to merge its two big funds at reduced STT rates. If the merger was done before the June cut-off, the AMC would have paid an STT of Rs 2.96 crore on Reliance Natural Resources fund. But its STT bill now will be just Rs 1.18 lakh. For Reliance Infrastructure fund it would have been Rs 1.09 crore but it will be mere Rs 43,427 now, based on its recent net assets.