Less is more

While monsoons are still awaited in many parts of the country, the merger season in the mutual-fund industry is in full form. Since January 2016, the industry has seen 34 regular plans and 29 direct plans merge with other schemes. The latest scheme to merge was L&T Global Real Assets Fund (May 11), which merged with L&T Infrastructure Fund. The number of scheme mergers in 2016 so far is more than the number of mergers that took place in the entire 2015. But what has caused this merger frenzy?

The SEBI had instructed fund houses to speed up the merger of similar schemes in order to simplify product offerings and help investors make a better choice. Many fund houses run multiple schemes of the same type. New fund offers (NFOs) that fund houses frequently keep coming up with add to this complexity. So many fund choices only confuse the layperson. Distributors also tend to push NFOs, which are at low NAVs, as some great deal. This leads to mis-selling.

Another factor that has expedited mergers is the relaxation in the fund-merger taxation. In the Union Budget for 2015-16, the taxation on fund mergers was done away with. The latest Budget has extended the exemption. Earlier mergers were treated as redemption in one scheme and buying into another and hence were subject to capital-gains tax.

While increase in the pace of fund mergers is certainly a welcome phenomenon, it's as much the responsibility of investors to understand the fundamentals of fund investing and stick to them. The Value Research community already knows that it's enough to have four-five funds of different types and from different fund houses in one's portfolio. Also, while selecting funds it's important to see its rating and performance history. And you are better off avoiding NFOs no matter how low the NAV is.