SEBI norms: What should you do if your multi-cap scheme decides to merge with another fund?

Barely a couple of days after the SEBI (Securities and Exchange Board of India) announced the new norms for multi-cap funds last week, it clarified that churning of the portfolios is not the only option for asset management companies (AMCs) for complying with the orders. The regulator said that fund houses can explore a range of options, including scheme mergers. But when schemes merge, their objectives and other features can change.

Will the scheme characteristics change?

Understand the target scheme’s objective. Your multi-cap fund may merge with another or integrate another into itself. If your expectation of multi-cap schemes is limiting downsides given its large-cap bias, you should check if this characteristic is still intact after the merger. On the other hand, if the bias towards mid and small-caps was your reason for choosing a multi-cap fund, then too you must investigate if the presumption would hold good post-merger.

Investors should also ensure that the scheme merger doesn’t lead to duplication within their portfolios. So, if the merger is with a large and mid-cap scheme, and the investor already has one such fund in her portfolio, she can consider exiting one of the two. A similar process has to be followed if it’s a case of merger with a large-cap fund.

What will my multi-cap morph into if there are no mergers?

Re-categorising into a large or large & mid-cap fund is an option for multi-cap schemes. A large-cap fund must have a minimum 80 per cent allocation to large-cap stocks. A large and mid-cap fund manager needs to invest a minimum of 35 per cent each in large-cap and mid-cap stocks. It is also possible that fund houses opt to become thematic funds – ESG or focused categories – to merge their multi-cap schemes.

Yes, this is possible. Ideally though, the fund manager of the multi-cap scheme should be the same individual handling the scheme zeroed in for the merger. This will ensure that there are no major changes in the investment style post-merger.

If your multi-cap scheme gets merged into another scheme, then keep an eye on the performance of the scheme into which it gets merged. This is because the surviving scheme’s track record would matter more in the future. After the multi-cap scheme is merged into another fund, it is likely that only returns of the latter are disclosed. Typically, fund houses take care of the better-performing scheme’s track record when two schemes merge.

Can size impact investment flexibility in certain categories?

In certain equity categories, size of the scheme can place some constraints on the fund management. If it’s a merger with a large & mid-cap fund and the resultant fund becomes much larger in size than the original one, the fund manager may face challenges. For a large-sized scheme, deploying funds in mid-cap firms may not be easy, as companies down the market capitalisation curve have limited liquidity and are susceptible to high impact costs. To further complicate matters, making small investments in such firms can lead to a minimal or negligible allocation in a large-sized scheme. If the multi-cap scheme is being merged into a large-cap fund, the size is unlikely to be a major challenge given the high liquidity in most large-cap stocks.

Should you stay invested in scheme after a merger or exit?

First things, first. Do not sell your multi-cap scheme now, till your fund house announces its decision.

That said, a scheme merger – if and when that happens – is a fundamental attribute change, which can only be done after getting the trustees’ approval and giving a load-free exit window to investors. During this 30-day window, investors can weigh the proposals and make their choice. If you feel that the merged scheme does not fit your needs, you may withdraw. But if you were okay with your multi-cap fund’s future course of action, you can stay invested.