Should you sell your investments in DSP Merrill Lynch MF?

If there is one emotion ruling the Indian financial markets right now, it is almost certainly ‘fear’. Thanks to the Lehmans and the Merrill Lynchs, there is fear of losing contracts, losing jobs and above all, losing money. And that’s exactly the sentiment ruling the investing community right now. Here are some of the recent posts on Moneycontrol’s messageboard:

“Hi. I need some clarification on the future of some MFs. I have got MFs in DSP Merrill Lynch and I need some help to know if the recent takeover of Merrill Lynch by the Bank of America will affect my MF investment in DSP Merrill Lynch.” Posted by: shiswam

“We have recently invested large amounts in DSP Merrill Lynch Mutual Fund for the long term horizon. But today I heard on TV about the company and am worried how safe our money is. Posted by: kapitan

“Merrill Lynch is taken over by Bank of America. Has it got any bad effect on DSP Merrill Lynch MF? I was thinking of investing in their Top100 scheme.” Posted by: guest

“I have heavily invested in funds of DSPML. In the context of Merrill Lynch being taken over by Bank of America; is it still beneficial to remain invested in DSPML?” Posted by: Manoj Singhal

We put these questions to Certified Financial Planner Kartik Jhaveri and he gives you a lowdown:

If you have invested in DSP Merril Lynch Mutual Fund, worry not

DSP Merrill Lynch, or any other mutual fund comprises of 3 entities that is,

i. The sponsor i.e. person creating the trust,

ii. A trust body i.e. the mutual fund and,

iii. The AMC i.e. the asset management company.

The trust is the custodian of the cumulative investments made by investors or unit holders. The trust is formed via a trust deed and amongst many clauses it also states that ‘unit holders would have beneficial interest in the trust property to the extent of individual holding in respective schemes’.

These holdings are held in the name of a board of trustees or the trustee company. The deed also states that ‘it would be the duty of the trustees to act in the interest of the unit holders’.

Thus if Merrill Lynch is wound up they cannot sell shares in these accounts and take the money home. The money belongs to the unit holders i.e. us and will continue to do so.

The AMC in turn, is only the manager of these funds, that is, the AMC gives advice on what stocks to buy or sell.

Merrill Lynch partnered with the Indian based DSP to provide advisory services for the AMC. So, by the very nature of the structure of mutual funds, in no way does the sale of Merrill Lynch to Bank of America cause any financial loss to DSP Merrill Lynch.

It’s another thing that in all this financial turmoil you will suffer some financial loss but that is only part of the regular market correction. And given that you are a long term investor these losses are only on paper.

Few would know that Merrill Lynch had, much before the sale to Bank of America, already sold its mutual fund arm to BlackRock Investments, globally. So either ways, there is no cause to worry, since DSP Merril Lynch is already out of the fold of Merril Lynch.

If you have invested in structured products, there is potential for some trouble

Some local mutual fund houses offer structured products in the form of equity-linked fixed maturity plans available. These are close-ended products that invest in rated equity-linked notes/debentures (ELD) issued by rated non-banking financial companies (NBFCs), mainly Citi Financial, Barclays, JP Morgan, Deutsche and Merrill Lynch. These ELDs are issued to the mutual fund company.

This means that the money is not with the mutual fund’s trust but it is actually given out to NBFCs. Though touted as low risk, high return products, these ELDs by their very nature are risky because the money is with the NBFC and they have not given any collateral to the MF.

Thus technically your money is not with the fund house in question. That is the potential trouble. So if things go really wrong and if the NBFC is not in a position to honour its promise, your money is at stake. Note that the guarantee of capital protection is issued by Merrill Lynch world wide. Now if Merrill Lynch fails or refuses or denies the promise made to the local mutual funds, and in turn us, then there is trouble.

If you have invested in any such scheme, the best bet as abundant caution might be to bear the exit load and exit if possible. Also check with your relationship manager or financial advisor.