Mutual funds are embracing the practice of merging one mutual fund scheme into another. Sundaram Mutual Fund has announced merger of Sundaram India Leadership Fund into Sundaram Growth Fund. Another such move has come from public sector player - SBI Mutual Fund. SBI One India Fund will be merged into SBI Magnum Equity Fund. Value Research, a mutual fund tracking entity has assigned four star rating to SBI Magnum Equity Fund and has not rated SBI One India Fund. Sundaram India Leadership Fund is a four star rated fund whereas Sundaram Growth Fund is a three star rated fund.

These mergers come after U K Sinha, chairman, Securities Exchange Board of India, expressed concerns over underperformance of equity schemes in Mutual Fund Summit held in June 2012. Experts are expecting some more such instances in near future, as mutual funds consolidate their product portfolios. Many times fund houses prefer to merge their underperforming schemes into larger schemes that are performing better. In the last year, fund houses such as JM AMC, Franklin Templeton AMC too has announced mergers of schemes. Franklin Templeton has opted to merge Franklin Pharma and Franklin FMCG Sector funds into Franklin Prima Plus Funds. Both the schemes were doing good and experts reckoned this move as a part of AMC's steps towards consolidating their product offerings.

"Whatever be the reason, investors have to decide if they want to exit on case to case basis. Investors may choose to redeem through the exit window provided without any exit load within one month before the merger takes place," says Dhruva Raj Chatterji, senior research analyst, Morningstar India. If their investments are less than one year old, the sales proceeds are subject to short term capital gains tax, which is at 15%.