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What should investors do when mutual funds merge term plans with debt funds

What should investors do when mutual funds merge term plans with debt funds-(A)

Earlier this month, HDFC Mutual Fund, the nation’s third-largest mutual fund company, announced the merger of six of its Fixed Maturity Plans (FMPs) into the HDFC Corporate Bond Fund. Elsewhere, and also in March, Aditya Birla Sun Life Mutual Fund announced the merger of 17 of its own MPFs into its short duration fund and one target duration fund. Last year, Kotak Mutual Fund also merged an FMP with a corporate bond fund.

Before discussing the pros and cons of such a move, let us understand why it happens.

Fixed-term plans are closed-end funds and, at maturity, the proceeds are intended to be returned to the investor.

Unlike open-end funds, which do not have an expiration date, MPFs have an expiration date, after which the investor gets the money back. With open funds, the investor can pay if necessary.

The problem with FMPs is liquidity. There will be no amortization by the portfolio management company (SGA). For regulatory reasons, FMPs are listed on the stock exchange, but there is practically no liquidity and it is difficult to get out before expiration.

FMPs have fallen out of favor mainly due to a lack of liquidity. Open funds are liquid and can be canceled at any time.

Target term funds are like FMPs and liquid. They are becoming more and more popular, and in the coming period, TMFs will replace FMPs.

AMCs don’t release new FMPs because they are losing popularity, except for a few that are released here and there. Previously, FMP investors were invited to invest proceeds from an expiring product in another FMP offered by AMC. This is consistent with the business objective of maintaining business volumes, which in this case are assets under management.

How does it work?

We understand that the maturity of FMPs means that AMCs are losing money, new FMPs are not being launched, and AMCs could lose business. What do AMCs do?

It is merging the FMP with an existing open debt fund. And how does it works? Since the money is intended to return to the investor at maturity, the regulations require the investor’s consent to merge their FMP product with another fund at maturity.

This also means that if there is no notification/consent from the investor, the money must be returned at maturity. Gone are the days of physical letters appearing for an investor’s approval signature. Now it goes through electronic communication. Only if an investor responds positively to the AMC, the money can be pooled into a transferred fund.

what does that mean to you?

Your cash flow

If you need money right away and you have a corresponding outflow, you do not need to consent. In this case, there is no need to debate whether fusion is right for you. In the event that there is no immediate need for money, the parameters are detailed below.

Tax efficiency

Indexation for long-term capital gains tax purposes requires a three-year holding period.

Once you are three years old, you will receive an additional indexing benefit for each additional year of ownership. From this point of view, it is better not to buy later. In other words, if you don’t get paid, your tax efficiency remains.

If you cash in your money and invest in another debt fund, the cycle starts over and must last another three years to qualify for the index benefit. Even if investment decisions must be made on the basis of performance, fiscal efficiency is a relevant criterion in this context.

What is the purpose of the new regime?

Investment decisions should be made based on the investor’s objectives, investment horizon, risk tolerance, and other aspects. The decision on the fund with which the FMP will merge will be made by the AMC. With the AMC, you have no choice in the basket of debt funds, you can only accept or decline. Look at the profile of the target open fund, and if it suits you, you can easily proceed. The parameters are:

Portfolio maturity

Higher portfolio maturity means higher potential volatility and vice versa. For example, if your PMF money goes into a corporate bond fund with a portfolio life of four years, you should ideally have a longer investment horizon of three or four years. If you have a longer one-year horizon, you can redeem at any time, but returns may be slightly affected by market movements.

Portfolio credit quality

Assuming you have invested in an AAA-rated FMP with high credit quality, you want to move to another fund with equivalent credit quality. You can view the portfolio of the target fund by downloading the portfolio/fact sheet from the CMA website.

Move or stay: which is the best option?

As mentioned, target term funds will replace FMPs over time. You can invest fresh money in TMF. For expired FMP Silver, the tax efficiency meter is reset for three years if you return it and invest in a different fund. And if the profile of the transferred fund suits you, you can continue the merger with an open fund.”



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