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Implication of Mutual Fund Mergers

You should not be surprised if the many fund families and mutual funds start to merge into one another. Due to the high dynamics of the mutual fund business, even a tenth of a percent is of great difference when it comes to performance. The existence of every mutual fund depends on its performance. That is why you should take careful consideration whenever a mutual fund you own is about to merge with another.

Fund Merger Reasons

Mutual funds can merger for a number of reasons. Some of them include:

  • Fund company mergers
  • Fund company buy-out
  • To cover up past performance
  • To make up for low assets
  • The mutual fund no longer meets the current trends and requirements from the field

A trend toward the increase in the number of mutual fund mergers has been observed. For example, in 2004 approximately 130 funds merged, whereas this number increased to 2000 funds in 2005.

Among the benefits for completing a merger with another mutual fund you can encounter such as the creation of economies of scale and saving on operational activities (e.g. mailing, audits and etc.).

A more sound reason for the occurrence of mergers among the mutual funds is the removal of uncompetitive mutual funds out of the picture. Since the performance record of the company that acquires the other mutual fund remains, the bad record of the acquired company no longer exists.

In order for the merger to take place, the approval of the mutual fund being acquired is required. There are extremely rare cases in which the shareholders were against the merger, since it is believed that the acquirer presents better opportunities to the mutual fund being acquired.

Actions to Take When Your Mutual Fund Merges

In order to avoid potential negative effects on your investment portfolio, you should make careful evaluation of the mutual fund you own that is about to participate in a merger. You should clearly identify the similarities and differences among the mutual funds that will participate in the merger.

You should pay closer attention to differences on investment strategies. For example, if your investment portfolio includes foreign mutual funds (a Japan fund let's say), and this fund is about to merge with a Worldwide fund, you should carefully consider the potential effects on your portfolio since you will own stocks from outside Japan. Additionally, you should clearly identify the reasons behind the merger in order to see if poor stock picking is not behind the merger.

You should consider any changes in the level of risk even if the funds that are about to merge are similar. Additionally, you should think over the effect that the merger will have on your portfolio. And in case the merging funds are bond funds, you should see whether there will be any tax implications included.

The merging of mutual funds leads to a change in the size of the mutual fund. If the mutual fund gets too large, there is always the danger of it becoming unable to find the needed for such large asset base stocks. Additionally, there have been some cases in which a $600 million mutual fund merges with a $50 million mutual fund, where the latter is the surviving one. In such a case you should be aware that something wrong is going on.

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