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Sebi’s latest guidelines on close-ended mutual fund schemes have been hailed by AMCs, but left investors confused. Lisa Mary Thomson
checks out how the new changes may work to your advantageIT’S A mixed bag of emotions that accompanies any change. Enthusiasm on the part of those who have advocated it, confusion and despair for those who have to put it in place and anxiety among those who are expected to reap the fruits of these changes.
The response to Sebi’s latest guidelines about the need for asset management companies (AMCs) to list new close-ended mutual fund schemes have been no different. While those within the industry are welcoming the decision, many investors are worried about what this means to them.Attempts to provide the answers while telling you about the advantages of investing in close-ended mutual funds.
In fact, getting a clear picture of how the close-ended mutual funds work is crucial before you look at the changes that have taken place. A close-ended mutual fund distinguishes itself from an open-ended one with respect to the stage at which you can enter this fund. Buying units of a close-ended mutual fund is only possible during the New Fund Offer (NFO) period. Moreover, with close-ended mutual funds having a fixed tenure, selling was supposed to be undertaken only once the period is over. The possibility of withdrawing from the fund by paying an exit load, however, existed.
NEW GUIDELINESAccording to the minutes of a Sebi meeting in early December, it will be obligatory for AMCs to list their close-ended schemes. Simultaneously, it was stated that no early exit would be allowed in any close-ended mutual fund scheme. In simple terms, what this means is that you will no longer be able go to your AMC, pay an exit load and redeem your money. If you want to liquidate your assets before the fund matures, then you will need to find yourself a buyer on the exchange. Another point that was made by the Board was, “For close-ended schemes, the underlying assets would not have a maturity beyond the date on which the scheme expires.”
MAPPING THE ADVANTAGESMany experts, however, see this decision by the Sebi as being advantageous to the investor on multiple fronts. As Lakshmi Iyer, head, fixed income & products at Kotak Mahindra Mutual Fund, points out, “Only those investors whose investment horizon is in line with the tenure of the scheme will now look at investing in close-ended funds.” This step will also further bring a degree of stability as the fund manager is free to make decisions without inflows and outflows of cash being a source of worry. According to A P Kurien, chairman, Association of Mutual Funds in India, “The changes should be accepted as being investor-protecting measures. The investors will no longer be impacted by others who make premature exits from the fund.”
Says Sukumar Rajah, CIO — equity, Franklin Templeton Investments; “These guidelines will help the fund contain the interest rate risk on the debt portfolio by matching the maturity of its debt securities to that of the fund. It will also help the fund remain fully invested through its tenure, thereby reducing a ‘cash drag’ on returns.” It is further expected that the time period of the fund will be sufficient for even investments in equity to give yields.
MAKING THE CHOICEAs always, the simplest key to deciding whether or not close-ended funds should be a part of your portfolio involves checking whether the product is in tune with your long-term investment goals, keeping in mind the returns that are promised vis-à-vis the risk that you will be taking. “You should also have reasonable clarity on your liquidity requirements in the near future and whether you will be able to hold on to your investments till they mature,” says Iyer. Experts recommend that investors should not base their decisions solely on short-term movements in the market. The short-term performance of a closed-ended fund could mirror the nature of the underlying stock and hence could be highly volatile. As an asset class, close-ended mutual funds could be a good choice if you are an investor with your eyes set on appreciation of your capital over a long time period.
ALLAYING FEARSWhile experts see a lot in favour of the guidelines, current investors can be rest assured that they still have the option of liquidating their assets with the AMC. It is said that the guidelines that have been issued will only be with respect to funds that will be launched in the future. Current investors in close-ended schemes are allowed to exit, subject to relevant exit loads and other costs. However, for those entering the scheme now, the only difficulty will be with regard to selling. “Those who want to sell may not be able to find buyers and even when they do, they may not be get the price they want,” warns Kurien.
MIXED BAGAMCs will have to list new close-ended mutual funds
No early exit will be allowed in any close-ended mutual fund scheme unless you find a buyer on the exchange.
Underlying assets will not have a maturity beyond the date on which the scheme expires.
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