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

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.

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

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.

HDFC Balanced XIRR 2 1 - Mutual Fund Mergers: how to track investments, calculate returns and pay capital gains tax post-merger

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.

 

 

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

  1. Hi Pattu,
    The tax calculation part is something we anyway have to calculate ourselves. My question is about the exit load on longer term units held for over a year by investors. The exit load free switch offered by HDFC AMC for holders of the erstwhile HDFC Balanced fund was valid till 31-May-2018. But how will HDFC treat the units now that they switched them in on 1-Jun-2018. Ideally no exit load should be charged on any units of HDFC Hybrid Equity if the original units were purchased before 1-Jun-2017 and so on. But due to the technicalities of the switch arent their systems prone to automatically charge exit load for units held for less than a year in HDFC Hybrid Equity Fund?

    1. The tax part may not interest you but many have this confusion. Anyways the exit load will be reset after the load free period. So the age of the unit does not matter.

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