One of the biggest advantages of mutual funds (MFs) is their simplicity. Also, being transparent, well-regulated, tax-efficient and varied makes them an ideal investment option for investors. However, considering there are hundreds of schemes one can invest in, making the right investment decision is anything but easy.
One key ingredient to build a successful MF portfolio is to follow a well-defined selection process, in line with your risk profile, time horizon, asset allocation and investment objectives. Even if you have managed to build an ideal MF portfolio, you may still be faced with situations requiring deft handling. Here are a couple of such situations and how these need to be handled:
Takeover of schemes in the portfolio by another MF
The most recent example of such a situation is an announcement by L&T MF to take over the schemes of Fidelity MF. If you have a scheme or schemes of Fidelity MF in your portfolio, you must be wondering what to do now.
First, it is important to understand that such consolidations are a part and parcel of an industry trying to find its feet. More, there have been examples of investors benefiting from successful mergers and acquisitions in the mutual fund industry. The prominent ones are HDFC MF’s takeover of schemes of Zurich MF and Franklin Templeton MF’s takeover of the schemes of Kothari Pioneer MF. L&T MF itself made its foray into the industry by taking over Cholamandalam MF
Second, if this deal gets regulatory approval, you will have an opportunity to exit from the schemes managed by Fidelity MF without paying any exit load (except investments under a lock-in period in a tax-savings scheme). However, the right way to deal with this situation would be to remain invested for 6-12 months to see how these schemes perform under the new management.
More, considering that Fidelity’s fund management team will continue to be a part of the set-up for some time and that a good portfolio build through a well established investment process doesn’t start performing poorly overnight, you won’t be taking too much of a risk by continuing in the schemes. However, it would be advisable to monitor the performance more actively than you might have been doing earlier. If these funds lag their peer group in term of performance after the review period, it would be time to act.
A successful fund manager leaves the fund
Another situation that often causes dilemma in the minds of investors is when a successful fund manager leaves the fund. While in most cases, such a situation would ring alarm bells, it may not be wise to react immediately by redeeming holdings from the fund. For example, if one is invested either in an index fund or in a fund wherein the rules regarding what the fund manager can do are clearly spelt out, the change in fund manger may not have much impact on performance.
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It is also important to look into the fund management style of the fund house, especially how much independence is given to the fund manager. Most big fund houses usually have guidelines that a manager must conform to. Besides, the process of investments is overseen by an investment committee. Therefore, a fund house following such an approach may not find it difficult to replace a good manager with another.
Even if it becomes clear that the former manger enjoyed considerable independence, a decision to exit should not be taken without finding as much as possible about the new manager. If he ran a different fund, check its record. Ideally, a new fund manager should be given at least six months or so to prove himself. Here again, if at the end of that period the fund has done poorly compared to its peers, it may be time to act.
The writer is CEO, Wiseinvest Advisors