Mutual Fund Mergers: how to track investments, calculate returns and pay capital gains tax post-merger

Published: June 8, 2018 at 11:34 am

Last Updated on

After the SEBI mutual fund categorization rules came into force, fund houses were forced to merge many schemes. In this post, I discuss common investor questions and problems regarding the merger – should I pay tax? how do I track? how do I calculate returns and capital gains on exit? – and so on with an example.

HDFC Balanced fund merged into HDFC Hybrid Equity Fund on June 1st 2018. I have discussed earlier what investor should do when the merger was announced: What now for HDFC Prudence and HDFC Balanced Investors?!

Let us assume an investor was holding HDFC Balanced Direct Plan Growth Option with the following investments

Mutual fund scheme mergers: HDFC Balanced example

That is, she has invested Rs. 1000 six times in the past. As on 1st June, HDFC Balanced has a NAV of Rs. 154.425 per unit and she has a total of 62.61483 units.

Since she did not exit during the exit load free period, HDFC would have switched those units to HDFC Hybrid Equity Fund.

Should we pay tax because of this fund merger? 

NO. This is an internal adjustment and the investor need not pay any tax because of this switch.

Will we lose anything because of this switch?

HDFC Hybrid Equity Fund had a NAV of Rs. 52.914 per unit on 1st June 2018. So this is how the switch works:

62.61483 x 154.425 = Current value of investment

62.61483 x 154.425 = (units in HDFC Hybrid fund) x 52.914

So she would now hold 182.7360 units of HDFC Hybrid Fund due to the switch. There is no loss.

On 6th June 2018, HDFC Hybrid Fund had a NAV of 52.528.

So the current value of her investments = 182.7360 x 52.528 = 9598.76

How to track funds that have merged?

If you are tracking on your spreadsheet with no fancy inputs, then as we will see below, it is trivial. If you are using my excel tracker or value research to track, then you have to sell HDFC Balanced and buy HDFC Hybrid Equity.

The new fund shows zero or negative returns! Why?

Since it is a fresh investment, it will only absurd values. To calculate returns, you must always account for investments before the merger at all times. Tracking portals may not offer you this option. My excel tracker has a”consolidate” option which does this for you automatically. You can also do this manually as we will see below.

How to compute returns of funds that have merged?

You can do in two ways: account for the switch in as a sell and a buy-event correctly.

Or you can ignore the sell and buy completely. Simply delete the two entries on 1st June and you will still get the same XIRR.

That is why I keep saying switch-is are internal events and can be ignored. The beauty of XIRR is that it only needs amount invested and the current value (if there are no dividends).

How to compute Capital gains tax after the scheme merger?

Please note: do not assume that the capital gains calculated by portals and CAMs is correct! If you want to pay the correct amount of tax, you need to learn how to calculate it yourself.

Suppose our investor redeems 10 units of HDFC Hybrid fund on 6th June 2018 at a NAV of Rs. 52.528.  This means she is redeeming Rs. 525.28. In order to compute capital gains, we need to track back the path of those units redeemed.

In 1st June 2018, those 10 units if part of Hdfc Hybrid would be valued at a NAV of Rs. 52.914. This is Rs. 529.14 in value. Now on 1st Juen 2018, HDFC Balanced had a NAV of 154.425. So we ask:

(10 units of HDFC Hybrid) x 52.914 = (how many units of HDFC Balanced) x 154.425

This gives us 3.42652 units of HDFC Balanced. Thus by redeeming 10 units of HDFC Hybrid, she has actually redeemed 3.42652 units of HDFC Balanced. Now we go all the way back to the first investment(s) as units redeemed on first-in, first-out basis.

On 1st Jan 2013, she had purchased units worth Rs. 1000 at a NAV of 64.365. This means she got 15.536 units of HDFC Balanced and she wants to redeem 3.42562units from those. So 3.42562 x 64.365 = 220.5478 is the purchase price. Now we need to go forward in time.

1st Jan 2013: 3.42562 units purchased at NAV of 64.365

On 31st Jan 2018, the NAV (balanced) was 160.41. So Value of those 3.42562 units = 549.6477 units

On 6th June the value of the equivalent of those 3.42562 units (= 10 units in Hybrid Equity Fund) had a value of 525.28

Since the value is lower than the value on 31st Jan 2018, no LTCG Equity tax need be paid. (of course, of course, there is one lakh tax-free limit, this is just an example). Watch this video to understand how it works

So this is a schematic of how capital gain is calculated for fund mergers. Now imagine if she had redeemed 100 units instead of 10, can you comment below on what will change in the calculation?

Capital gains computation in case of mutual fund mergers

All other tax rules remain the same. If you have any more questions about these fund mergers, leave a comment below.



Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps