Yet another takeover has taken place this year in the mutual fund industry with Principal Mutual Fund acquiring the assets of Sun F&C Mutual Fund. The first acquisition this year was that of HDFC Mutual Fund's buyout of Zurich India Mutual Fund. Apart from taking over the assets of SUN F&C, Principal also plans to merge some existing schemes --having similar investment objective--with that of its own schemes.
With this takeover, Principal's assets would rise by nearly Rs 500 crore. It managed Rs 1,900 crore of assets, as on June 30, 2003. Also, another 70,000 investors will be added to its kitty, taking the total to 230,000 investors. The takeover news came days after the AMC re-christened itself as Principal Mutual, after buying out IDBI's entire stake in the erstwhile IDBI-Principal Mutual Fund.
The most striking feature of the take-over is the merger of schemes of Sun F&C with Principal's schemes. For instance, equity funds of Sun F&C will be merged with the equity schemes of Principal. The same holds true for Sun F&C's monthly income plan, bond and short-term funds. However, Sun F&C Resurgent India Equity Fund will continue to be managed separately. This is a clear deviation from what happened in the case of other mergers that have taken place so far—like that of Pioneer-Templeton and Zurich-HDFC—in the sense that schemes with similar investment objectives were not merged despite a change in the AMC.
The probable mechanism to be followed for the mer-ger of schemes is as follows. There will be no change in the NAV or the investment objective of the schemes of Principal. But a Sun F&C investor will be allotted new units based on the NAV of Principal's respective schemes. For example, suppose an investor holds 1,000 units of Sun F&C Balanced Fund, and on the day of the merger, the NAV is Rs 7.63, this means the value of the investment will be Rs 7,630. Therefore, the Sun F&C Balanced investor will get 635.84 units of Principal Balanced fund (Rs 7,630 divided by the NAV of Principal Balanced at, say, Rs 12) as against the 1,000 units of Sun F&C Balanced.
Is the Merger of Schemes Necessary?
To address this issue, one would need to understand both the investor and the AMC's perspective. In the AMC's interest, it makes perfect sense for funds with similar mandate to be merged. This will help in avoiding duplication and will help the fund in achieving economies of scale. For investors, this could mean a lower expense ratio due to the larger asset base. Also every investor has an investment objective in mind before he or she chooses a fund. This can get diluted if a merger happens. A merger forces you to make a choice: join the new scheme or exit the old one.
The interesting thing in the case of Principal-Sun F&C merger is the merger of Sun F&C Emerging Tech Fund with one of Principal's equity schemes. Says Sanjay Sachdev, CEO, Principal Mutual: ''Principal as a fund manager doesn't believe in sector funds. We also think that investors would not mind being in an aggressive equity scheme rather than a technology fund''
From the tax point of view, post-merger, the investor who stays with the fund will be considered as having exited the earlier scheme and making fresh investments in the new scheme. Thus, they will have to pay a capital gains tax—long-term or short-term—depending on the duration of the investment.
In the case of Sun F&C MIP and Sun F&C Balanced Fund, it won't be a cause for concern as they have been dormant performers. However, Sun F&C Value and Sun F&C Bond investors will be required to pay capital gains tax, wherever applicable, since they will have to redeem the fund any way. Those who don't opt for the new scheme, will be considered as having redeemed the scheme.
On the whole, post-acquisition and post-merger of schemes, Principal is expecting that some Sun F&C investors would move out. Though this acquisition will add value to Principal AMC in terms of investor base, a Sun F&C investor should review his portfolio before taking a call on staying with Principal or exiting the fund.