Investors can exit without load when a fund house changes hands

Sebi gives one-month window to move out but transaction costs, capital gains tax have to be paid

Investors in Fidelity India Fund Management must be a worried lot. With recent reports suggesting the fund house may sell its India business, almost a million customers (according to folios, Amfi data, as on September 2011) will have to take a call on whether or not to continue with the new management.

In the interim, till/if the sale happens, the main question is whether to continue their systematic investment plans (SIPs) or not.

Investors in mutual funds have faced such a situation several times in recent years. A number of fund houses have seen change in managements – such as Lotus Mutual Fund (buyer Religare), DBS Chola (buyer L&T) and Benchmark (buyer Goldman Sachs). Some of these, in fact, have happened within just a few days, without giving investors time to understand the ramifications.

In such times, investors are provided with an exit option by the Securities and Exchange Board of India (Sebi). “The investors will be intimated by a letter from your fund house, explaining the changes that will happen after the takeover, the managerial changes, ownership and so on. The letter will include details of the exit window, wherein investors who wish to redeem their units could do so without any exit load,” says senior Morningstar analyst Dhruva Chatterji.

For instance, when Goldman Sachs took over Benchmark, investors who wanted to redeem their units were given time between July 11 and August 10, 2011. In an open-ended fund, you can exit schemes even after the window is closed. This available exit window, according to Sebi guidelines, is a month.

Once the formal announcement is made by the fund house, one could look at the structural changes being made. One should look at how the current schemes get integrated with those of the new fund house and how this would affect current portfolios. And, most of all, they should see who is taking over the fund house. The pedigree of the acquirer, the fund managers, etc, should also be considered, according to Wiseinvest Advisors CEO Hemant Rustagi. In case the fund house is taken over by a company with no background in the business, as it happened in the case of L&T or Religare, one should look at the group’s performance.

In the interim, till the announcement comes, financial advisors advise a wait-and-watch policy. “There is no need for investors to press the panic button and redeem their units,” says Suresh Sadagopan, a certified financial planner.

In case one is investing through SIPs, the decision could be tough. Financial planners say, if the scheme is doing very well, there is no reason to exit or stop putting in money, because once the change in management takes place, there would be a free exit route. However, if the scheme’s performance has been poor, taking a call on SIPs becomes simpler – just stop further investments. “If one is unsure of the circumstances, one should avoid buying fresh units of the fund house till there is clarity,” adds Sadagopan. Putting fresh money is a strict no-no.

Even as there is no exit load, there would be some costs. Sebi guidelines ensure investors do not have to shell out anything on account of exit load, but there would be a securities transaction tax of about 0.25 per cent. If an investor is exiting in less than a year, there would also be a 15 per cent short-term capital gains tax.

In case of debt schemes, long-term capital gains are taxed at 10 per cent with indexation and 20 per cent without it. In the short term, the gains are added to your income and taxed in line with the applicable slab.