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Would scheme mergers revive your investments? - Outside View by PersonalFN
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Would scheme mergers revive your investments?
Apr 1, 2011

In the year 2006, 2007 and early 2008 (before equity markets around the world melted down to the news of the U.S. Subprime mortgage crisis and the Lehman Brothers bankruptcy) the Indian equity markets were buzzing, and numerous mutual fund houses in great gusto were launching several New Fund Offers (NFO) banking on upbeat investor sentiments. The objective in this case was clear - "to garner more AUM (Assets Under Management)". But now after facing discomfited time during the turmoil of the equity markets, mutual fund houses are trimming down on their product portfolio size. To simply put, strategically they are merging some schemes with the existing ones.

Recently, JM Mutual Fund announced the merger of 8 equity oriented mutual fund schemes with the existing ones, in the following manner:

Name of the equity oriented mutual fund To be merged with
JM Agri & Infra JM Basic Fund
JM Fin Services Sector JM Equity Fund
JM Telecom Sector
JM Large Cap Fund
JM Contra JM Multi Strategy Fund
JM Mid Cap Fund
JM Small & Mid-Cap
(Source: JM Mutual Fund)

And to follow suit, JP Morgan Mutual Fund and UTI Mutual Fund too has announced scheme mergers. JP Morgan Mutual fund has announced the merger of JPMorgan India Alpha Fund (a debt oriented interval scheme) with JPMorgan India Treasury Fund (an open ended income scheme). While UTI Mutual Fund has announced the merger of UTI Variable Investment Scheme - Index Linked Plan (an open ended equity scheme) with UTI Balanced Fund (again an open ended equity oriented hybrid scheme).

But all these scheme mergers do they really make any sense, does it really benefit you investors?
Let's assess that by taking the case of JM Mutual Fund. During the upbeat sentiments of the equity markets (during the year 2006, 2007 and early 2008) JM Mutual Fund launched 9 equity oriented mutual fund schemes by banking on this upbeat investor sentiments. And to capture investors' attention the fund house also heavily publicised their so called "star fund managers".

Making hay when the sun shines
Name of the equity oriented mutual fund NFO open Date NFO Close Date Inception Date
JM HI FI 20-Feb-2006 20-Mar-2006 07-Apr-2006
JM Fin Services Sector 02-Nov-2006 20-Nov-2006 07-Dec-2006
JM Telecom Sector 02-Nov-2006 20-Nov-2006 07-Dec-2006
JM Small & Mid-Cap 09-Mar-2007 07-Apr-2007 30-Apr-2007
JM Contra 16-Jul-2007 14-Aug-2007 07-Sep-2007
JM Agri & Infra 19-Nov-2007 18-Dec-2007 16-Jan-2008
JM Tax Gain 24-Dec-2007 25-Mar-2008 31-Mar-2008
JM Core 11-Series 1 14-Jan-2008 05-Feb-2008 05-Mar-2008
JM Multi Strategy 31-Jul-2008 29-Aug-2008 23-Sep-2008
(Source: ACE MF, PersonalFN Research)

But as the equity markets around the world rocked on news of the U.S. subprime mortgage crisis and the Lehman Brothers bankruptcy; JM Mutual Fund experienced their much publicised "star fund managers" saying good bye to them.

But this good bye greeted was after causing much damage to the returns of the mutual fund schemes. For many of you investors who invested in mutual fund schemes (from this fund house) on the premise of the persuasive talk on "importance of star fund managers" given by agents / distributors / relationship managers, have either eroded wealth or received sub-optimal returns on your investments.

Report Card
Scheme Name Fund Manager 6-Mth (%) 1-Yr (%) 3-Yr (%) 5-Yr (%) Since Inception (%) Std. Dev (%) Sharpe Ratio Portfolio Turnover Ratio (%) Expense Ratio (%) AUM* (Rs. in Cr.)
Performance of schemes to be merged
JM Agri & Infra (G) Mr. Sanjay Kumar Chhabaria -22.0 -18.6 -29.6 - -36.1 11.94 -0.25 7.16 2.39 120.01
JM HI FI (G) Mr. Sanjay Kumar Chhabaria -21.4 -10.5 -23.4 - -13.5 10.96 -0.22 6.51 2.50 10.83
JM Fin Services Sector (G) Mr. Sanjay Kumar Chhabaria -14.7 11.7 -9.0 - -0.4 12.00 -0.07 2.37 2.50 21.40
JM Telecom Sector (G) Mr. Asit Bhandarkar -19.4 -6.9 -12.9 - -6.9 11.44 -0.10 5.24 2.50 7.70
JM Large Cap (G) Mr. Sanjay Kumar Chhabaria -7.5 9.0 3.2 1.3 9.9 8.21 0.00 8.31 2.50 5.21
JM Contra (G) Mr. Sanjay Kumar Chhabaria -20.7 -11.2 -19.2 - -17.9 12.54 -0.13 8.88 2.37 202.26
JM Mid Cap (G) Mr. Sanjay Kumar Chhabaria -21.2 -8.7 6.2 2.6 12.9 10.90 0.03 1.02 2.50 9.53
JM Small & Mid-Cap-Reg (G) Mr. Sanjay Kumar Chhabaria -27.1 -16.6 -25.2 - -17.5 14.34 -0.15 9.18 2.50 57.26
Existing mutual fund schemes
JM Basic (G) Mr. Asit Bhandarkar -27.8 -27.2 -19.8 -4.7 18.7 15.08 -0.10 8.31 2.28 353.93
JM Equity (G) Mr. Sanjay Kumar Chhabaria -11.0 2.2 -3.1 2.2 8.3 10.89 -0.04 9.32 2.50 33.05
JM Multi Strategy (G) Mr. Sanjay Kumar Chhabaria -16.4 -4.9     13.1 10.10 0.16 13.53 2.50 26.92
JM Emerging Leaders (G) Mr. Asit Bhandarkar -28.4 -11.7 -17.0 -10.8 -6.3 15.16 -0.08 14.57 2.37 193.74
JM Tax Gain (G) Mr. Sanjay Kumar Chhabaria -15.3 -2.4 - - -11.9 11.19 -0.10 3.73 2.50 63.01
BSE SENSEX   -6.5 6.7 5.5 11.2 - 9.72 0.03 - - -
BSE-100   -8.3 4.9 5.3 11.0 - 10.17 0.03 - - -
BSE MIDCAP   -17.4 -0.6 2.3 5.4 - 12.37 0.02 - - -
(NAV data is as on March 25, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period.
Risk-free rate is assumed to be 6.37%)
*AUM as on December 31, 2010
(Source: ACE MF, PersonalFN Research)

If we observe the return of the equity oriented mutual fund schemes - both the existing ones, as well as those which are going to be merged; they have disappointed you investors as exhibited in the table above. In fact most of them over a 3-Yr time frame have eroded wealth for you investors. Even if we assess the returns since inception the picture isn't any different, as most of them have yielded negative returns. Moreover when compared to the broader indices, the returns of the respective funds look absolutely dismaying.

So, if one were to invest Rs. 10,000 each in the respective schemes at the time of the respective fund's inception, you have either witnessed wealth creation or wealth erosion as depicted by the chart below.

(Source: ACE MF, PersonalFN Research)

Most of JM's equity oriented funds have exposed investors to very high risk (as denoted by the Standard Deviation), but have failed to compensate their investors well for the risk taken (as denoted by the Sharpe Ratio) thus making them high risk-low return investment propositions.

Even though the portfolio churning maintained by most equity funds is good (i.e. it is low), it purely reflects that the fund manager's stock bets going wrong and the fund manager getting stuck in them. It does not reflect any healthy picture of any good buy and hold strategy; because if that did, it would have been displayed in the form of appealing returns generated by the respective funds.

The JM Mutual fund's decision on merging its equity oriented mutual fund schemes seems to be driven by reducing its product portfolio thus intending to decrease the load of number of mutual fund schemes managed by their fund managers - Mr. Sanjay Kumar Chhabaria and Mr. Asit Bhandarkar. So far, after the earlier fund managers greeted good bye to JM Mutual Fund, Mr. Chhabaria and Mr. Bhandarkar the duo have been managing almost all the equity oriented mutual schemes of the fund house, barring the index fund which is managed by Mr. Chaitanya Choksi. (Mr. Chhabaria has managed 71% of the total number of equity oriented mutual fund schemes, while Mr. Bhandarkar has managed 21% of the total number of equity mutual fund schemes.)

Hence we strongly affirm that despite the merger of the 8 equity oriented mutual fund schemes (with existing ones), JM Mutual Fund would continue to jeopardise investors' money. Moreover, they are just merging the ugly performers (since inception), with the existing ones which have delivered unappealing returns. Hence now the ugliness would also continue to reflect in the existing mutual fund schemes too. This is purely a case of rectifying the mistakes of the past now after having caused much damage to your hard earned savings. Hence we recommend that you don't fall prey to the fancy strategies followed by the fund house, and prudently redeem your investments in JM Mutual Fund.

Speaking from a holistic angle, in our opinion all these scheme mergers are intended to trim the product portfolio. This reflects a strategy of rectifying the mistakes done by the fund houses in the past by launching too many unnecessary mutual fund schemes. We believe that in a scenario where there's already a huge plethora of mutual fund schemes (making it difficult for investors to select winning mutual funds), what is required is simple and easy to understand products. The objective of garnering more AUMs should be set aside by the mutual fund houses and they should introduce only easy to understand products which have the capability of wealth creation.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Would scheme mergers revive your investments?"


Apr 7, 2011

JM Financial is definitely one of the worst performing Fund houses. Almost all funds have negative returns for a long period of time. I had invested in 2 to 3 of those funds. Even during 2009 rally it did not give decent returns. While most of their peers have given atleast 80-100%, JM MFs have returned negative or negligible returns. I regret not getting out of it much earlier.

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