Mutual Funds and Portfolio Consolidation – AxisDirect
Oct 23, 2017 | Source: Livemint
Perils of having multiple folios in one Fund House
Many financial advisers suggest that systematic transfer plans (STPs) are a better way of investing lump sum amounts in equity funds—invest a lump sum in a liquid fund and transfer a fixed sum to equity funds at fixed intervals. Of course, both these funds have to be from the same fund house. Did you know, they also have to be in the same folio? Let’s say you have investments in HDFC Liquid Fund (HLF; in folio number 123) and HDFC Equity Fund (HEF; in folio number 999) and you want to move money from HLF to HEF. If you think your money simply gets moved from HLF to HEF, you’re wrong. In practice, the fund house makes a new investment in HEF. You will now have three separate investments: the initial HLF in folio 123, a new HEF in folio 123 and the existing HEF continues in folio 999.
When we build portfolios, we mostly focus on the schemes we buy and ignore how we buy them. Over time, we may buy many schemes from one fund house. If we ignore folio numbers, we could create many folios. This matters because the account statements that fund houses send us are folio-wise. If you have three folios, you will have to manage three account statements.
A better way to manage your mutual fund investments is to consolidate. One way to do this is to try and minimise the number of folios you have with a fund house. Remember, you can only merge folios within a fund house. A folio is like an umbrella over your different mutual fund schemes. You can also think of a folio as a folder in a filing cabinet and your individual schemes stacked up in a folder. The problem is, multiple folios in the same fund house can also arise if we have had multiple distributors. As a distributor can only access details of the folios that she manages—and you can thus have multiple account statements—multiple folios can make it difficult to take a holistic view of your money box.
How to consolidate
Try to align yourself with one distributor or adviser. To do this, you may first need to transfer your holdings from one adviser to another (the one you wish to retain). And now the process of consolidation can begin. Before you start consolidating folios, ensure two things are in order.
One, you can only consolidate folios with identical holdings. Both the acquiring (the one you want to retain) and the acquired (the one you want merged with another) folios should have identical account holders and in same sequence.
Second, the mode of holding should be the same: you cannot merge a folio whose holding mode is ‘either or survivor’ with another whose mode is ‘joint’, even if names and sequence of account holders in both folios are the same. But this, you can overcome. If all the holders of the folios give a joint and signed declaration to change the mode of holding, it can be done and the folios can be consolidated.
Is consolidation always good?
Not always. Some advisers also feel that separate folios can be held if each folio is linked to a specific goal.
In such cases, it’s okay to have the same scheme in two different folios as long as the two folios have been clearly earmarked for different goals.