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Mutual funds are awaiting the reduction in securities transaction tax (STT) to merge more of their schemes in the current financial year. This means the cost of merging schemes for a fund house will come down substantially. The STT for all equity mutual funds at both the fund and exchange counters will come down to 0.001 per cent.
Till May 31, redemptions for equity schemes, including exchange traded funds, at fund counters will continue to be 0.25 per cent, while at the exchange counters, it will be 0.1 per cent.
According to sources, mergers of schemes by fund houses had been put on hold owing to the high cost of the process involved.
"Every time a scheme is merged with another, the fund house has to sell the units of the scheme being merged, and then buy it into the scheme into which it is being merged. The STT applicable during this transaction has to be borne by the AMC (asset management company) and cannot be passed on to the investor," said an official from a mid-sized fund house, adding it substantially added to the expenses of a fund house.
According to data from Value Research, FY12 saw the highest number of scheme mergers at 46, much more than the 17 seen in the previous financial year. As at end FY13, as many as 27 schemes had been merged.
So far in FY14, two fund houses are looking at merging schemes. LIC Nomura Mutual Fund has already announced its plans to merge four of its schemes - LIC Nomura MF Top 100, Systematic Asset Allocation, Vision and Opportunities with LIC Nomura MF Equity Fund - with effect from May 7.
IDFC Mutual Fund is also looking at merging schemes in FY14. "We are looking at a couple of schemes on the equity side, but we are waiting for the STT to be brought down which will happen in June. After that, we will put it up before the board for approval," said Kalpen Parekh, chief executive officer of IDFC MF.
The Securities and Exchange Board of India (Sebi) had been concerned about the existence of a large number of equity-oriented funds with similar themes, leading to confusion among investors. To this effect, the regulator issued a circular in 2010 laying down rules for the merger or consolidation of mutual fund schemes.
A fund house needs to take approvals from both the trustee and Sebi before merging schemes. The main criteria for the merger of schemes is that the investment objective of the schemes to be merged have to be matched. Investors are given a one-month window to exit the scheme if they wish to.
