Kotak MF global schemes’ merger: What it means for investors

Kotak Mutual Fund has decided to merge three of its schemes. Kotak US Equity Fund (KUEF) and Kotak World Gold (KWG) will be clubbed with the Kotak Global Emerging Market (KGEM) fund. The merger will be effective from February 26. Given that the merger will result in a fund that differs in its objectives from those of the individual schemes, investors may need to take stock and make changes to their portfolios.

KUEF (Asset size: Rs 13.38 crore) acts as a feeder to a fund that invests in US stocks; similarly, KGEM (Rs 34.2 crore) too is a feeder that invests indirectly in emerging market shares. KWG (Rs 49.6 crore) invests in stocks of gold mining companies indirectly, again acting as a feeder fund. On February 26, unitholders of KUEF and KWG will be allotted units of KGEM.

Why the merger?

Lakshmi Iyer, CIO-debt & head-products, Kotak AMC says, “Both the categories are thematic and hence investor demand for these funds is quite cyclical in nature. The decision to merge these funds is more from a consolidation perspective than being suggestive of any view of the respective asset classes.”

Kunal Valia, a Mumbai based independent investment analyst said, “Globally as well, funds with smaller assets under management are either wound up or merged.”

Investors in the merging schemes will be given an exit option without any exit load till February 25. Exiting is not mandatory. However, you will be liable to pay taxes on capital gains, if any.

What should investors do?

KGEM will offer investors exposure to stocks of emerging markets. The present portfolio of the scheme includes units of Signature Emerging Markets Fund and ishares MSCI Emerging Markets ETF as of  December, 2019. The fund has delivered 7.88 per cent returns annually over the last three years. HSBC Global Emerging Markets Fund delivered 8.49 per cent over the same period.

If you are an existing investor in the merging schemes, you will not have exposure to US stocks and gold miners’ shares. If you invested in these schemes for taking exposure to these themes, then it is time to shift to other funds offering such avenues.

“KGEM fund is more diversified as it has many geographies as opposed to a single country fund,” says Iyer. “Investors tend to invest in global fund of funds also as a currency play and not just for asset class considerations, which can been still achieved by investing in KGEM,” she added.

However, investors must be aware of the changing risk-return profile of their investments. “For investors in merging schemes, especially in KUE, the risk-return profile changes drastically,” says Ravi Kumar, founder of Bengaluru based Gaining Ground Investment Services.

When you invest in shares of companies listed in the US, you are exposed to many businesses based on emerging technologies, one of the better regulated markets, and favourable rupee-dollar exchange rates. However, as you move to emerging markets in search of high growth, you are exposed to currency, geo-political and growth risks associated with many countries. Investors should be compensated with high returns for the extra risk they are taking. Investing in emerging market stocks would be suitable for those with above-average risk appetites.

Ravi Kumar recommends investing up to 10 per cent of your equity portfolio in US equities and 8 to 10 per cent in emerging market shares. “If you do not have any overseas stocks exposure, you should remain invested in KGEM,” he says.