Securities and Exchange Board of India (SEBI) has released a new set of norms for mergers of mutual fund schemes. These were issued on Thursday to deal with the mergers resulting from SEBI’s fund classification norms announced in October 2017.

In its October notification, SEBI had laid down rules for classifying mutual funds into specific categories. These rules laid down five basic categories of mutual funds – Equity, Debt, Hybrid, Solution-oriented and Others. We looked at the equity category here.

The regulator also mandated that fund houses maintain only one scheme per sub-category. This rule meant the fund houses would have to merge schemes that occupy the same category such as HDFC Balanced Fund and HDFC Prudence Fund, both of which are equity-oriented hybrid funds.

The mandatory mergers opened up a question about how fund performance is to be reported after a merger. Rather than leave this to fund houses, the regulator has issued a set of rules in this regard. They are as follows:

1. When two schemes having similar features get merged, the weighted average performance of both schemes needs to be disclosed

2. When Scheme A is merged with Scheme B and the features of Scheme A are retained, the performance of Scheme A needs to be disclosed

3. When Scheme A is merged with Scheme B and the features of Scheme B are retained, the performance of Scheme B needs to be disclosed.

4. When Scheme A is merged with Scheme B and a completely new Scheme C is created, past performance need not be disclosed.

The SEBI circular will go into effect from 1st May 2018. You can read it in detail here.

Reacting to the development, Rajat Jain, CIO of Principal PNB Asset Management Company, told RupeeIQ that the SEBI norms would “let products be more true to their label and allow for a fair performance comparison among funds from different houses”.

He also dismissed concerns about the removal of the requirement to provide past returns in which two schemes merge to form a third. “The waiver of past performance record of a fund only arises in a case when the scheme features are changing. It would not be fair to look at past performance in such cases as the new scheme would have new features anyway,” he added.

RupeeIQ Take

Some fund houses may seek to merge ‘weak’ schemes with strong ones so that overall performance looks good in the future. Alternatively, they may merge two weak schemes into a third new one. In such a case, they will not be required to display past returns. All this can come in the way of clear evaluation of past performance, in the future.

If you are selecting a fund after 1st May, look for a merger announcement in the news. If there is an announcement, you will get the past performance of both the ‘weak’ and ‘strong’ scheme (if this is indeed the case) from past fund factsheets. These can be downloaded from the archives on fund house websites. In other words, you will have to take some extra efforts with fund selection if your shortlisted scheme has been merged. However, it can make a significant difference to the correctness of your final choice.

Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at