Mutual funds: It's best to merge several folios

We all like to make money out of our mutual fund investments, but get nightmares when it comes to managing the paperwork.

MFs send you an account statement almost every quarter - sometimes every month. You can't lose them because they are permanent records of your investments and proof that you have actually invested.

Then again, for how long do you preserve these account statements? Worse, if you have several schemes within the same fund house, you can end up having different folios for which your MF would send you separate account statements at the end of every financial year.

Consolidation works

One way to reduce your paperwork is to consolidate your folios, within fund houses. A folio is a combination of all your investments done within a fund house. Say, you have invested in three schemes of Franklin Templeton MF - Franklin India Bluechip, Franklin India Prima and Templeton India Pension Plan.

So, while Franklin Templeton allots you account numbers for each of these three schemes, it would also club all your investments with the fund house under one single umbrella, called a folio, and allot you a unique number, called a folio number.

One house, one statement. As the Securities and Exchange Board of India rules mandate that fund houses must send you account statements once a year, your MF would then send you only one account statement that contains details of all your holdings with the fund house.

It's like putting all your relevant files (think of these as your account numbers) in a single cabinet (think of this as your folio). Now, wouldn't this be convenient?

Easy to monitor. A compact account statement that contains details of a number of your investments within the same fund house absolves you of comparing different account statements.

One change affects all. Having a single folio number also makes operational sense. For instance, if you want to change your bank mandate - the bank account that you have chosen to receive your MF scheme's dividends and redemption proceeds in, you need to give your instructions just once.

Such changes will then be imposed on all your investments within the folio. Numerous folios within the same fund houses, on the other hand, would mean that you give such details as many times as the number of folios you have.

Offline broker with offline broker. Here's where consolidation works seamlessly. Say, you buy your MF units from your agent and you get your account statement within a week. Your investment also gets allotted a folio number. Assume that some months later you are not satisfied with the agent's service and decide to switch agents.

In this case, you just need to submit the original folio number for fresh investments. Your MF will consolidate your fresh investments that you did through the second agent with your earlier investments (with the same fund house) with your first agent. Your account statement will reflect details of the original and the latest investment.

The roadblocks

Convenient, but not quite easy as you would think, as one of Outlook Money's avid readers, Gurgaon-based Nagender Prasad, 37, and a director of a BPO firm, recently found out.

He invested in Fidelity Equity Fund in May 2005 during its New Fund Offer period through a 6-month systematic investment plan with the help of Bajaj Capital - a national-level MF distributor.

Later, he purchased more units of FEF through online broker, www.ICICIdirect.com, in May 2006 and again in April 2007.

Later, when Prasad wrote to Fidelity MF, asking them to consolidate his three FEF investments into a single folio under www.ICICIdirect.com, Fidelity refused saying that he would need to submit a no-objection certificate from Bajaj Capital. What went wrong with Prasad's investments and why did Fidelity refuse?

Offline broker with online broker. Here's where consolidation can be a pain, as Prasad found out. If you buy MF units once from an online trading website, like www.ICICIdirect.com, and then again from your usual agent separately, you cannot merge the two sets of units in a single folio even if all these units belong to the same fund house and scheme.

This is because of the difference in the way an online and a brick-and-mortar agent are structured. Your online portal is typically a one-stop shop for all your investment needs.

They aim to exclusively service you and do not share all your details with the fund houses that you invest in through them. For instance, sources say that if one invests in MFs through www.ICICIdirect.com, MFs only get their name, date of birth, Permanent Account Number and bank account details.

The portal doesn't share the contact details. Market sources say that as investor details are maintained with registrars, online portals wouldn't want the details to land there lest their competitors get hold of their client's information and poaches them.

Why NOC. If you want to transfer your MF units that you had purchased through a brick-and-mortar agent to your existing folio with an online portal, you need an NOC from your agent, thanks to a 2001 directive of the Association of Mutual Funds of India.

The commission game

Your distributor gets loyalty fees - typically called trailing fees - for as long as you stay invested in that fund (in addition to the entry load of 2.25 per cent). Market sources say trailing fees can go up to 0.30 to 0.75 per cent of the prevailing investment value.

Your original distributor continues to earn this commission, even if you buy additional units from another broker.

However, should you decide to transfer these units to your new broker, your original broker will cease to earn this commission. "If MFs were to permit investors to change their brokers without seeking the NOC, distributors get offended and may refuse to sell our schemes. Hence, Amfi's rule came into place," adds a head of investor services at a private sector MF.

Although you can consolidate your folios of units bought from two or more separate brick-and-mortar brokers with ease, you need an NOC from the original broker, if you wish to cease his commissions that he earns on your initial investment.

Sources say that while most online portals do give NOCs on time, brick-and-mortar distributors can make you run from pillar to post.

Prasad has still not opted for his NOC from Bajaj Capital as he fears he might not get it soon enough. He adds: "Why do I have to run after my previous broker when I am not even switching fund houses. It's worse that Amfi has given its blessings to the practice."

We agree. Is Sebi listening?