While high redemptions by big corporates and high net worth individuals (HNIs) created an unprecedented crisis within the mutual fund industry in the months of September and October, now it is the market regulator’s turn to restore order by changing the rules of the game. Securities and Exchange Board of India (Sebi) on Thursday decided that no early exit will be allowed in any close-ended scheme. It has also asked fund houses to list close-ended funds on stock exchanges.
“The schemes, which have been approved earlier but have not yet been launched, will also have to be amended accordingly,” said Sebi chairman C.B. Bhave.To avoid any mismatch between asset and liability, Sebi has also mandated that close-ended mutual fund schemes should not invest in assets whose maturity is not in line with the fund’s maturity. “The October incident has thrown up a lot of issues and this is just one of those. We are also looking into the underlying assets of liquid funds,” said Bhave.
The rationale
While the primary trigger was the high level of redemption that the mutual fund industry suffered during the September and October, there is also a problem with the debt markets. Due to illiquidity in these markets, mutual fund managers, when faced with redemption pressures, had to resort to distress sale. This in turn lowered the NAVs of the funds and affected the returns of investors who wanted to stay on till maturity.
“Markets for securities had become illiquid in September and October, which led to distressed selling by some funds. Such a move affects the investors who want to stay back. Therefore, to protect the interest of the investors, Sebi has made this move,” said Sandesh Kirkire, chief executive officer, Kotak Mahindra Mutual Fund.
How will it affect you
Earlier, investors could exit close-ended funds by paying an exit load. “Now, any investor who comes in should come with the clear understanding that he will stay put in the fund till maturity,” said Kirkire. While investors who are uncertain about their immediate liquidity needs might stay away from close-ended funds, disciplined investors, who plan to stay till the maturity of the plan, stand to benefit.
“This regulatory obligation will save fund managers from distress sales. This has been done with the intent of guarding the interests of the remaining investors. The order will also drive fund managers to be disciplined in building their portfolio as funds have been debarred from buying bonds of longer maturity than their own,” said Dhirendra Kumar, chief executive, Valueresearch.Agreed Surya Bhatia, Delhi-based financial planner: “It is a welcome move and is in the interest of investors who plan to stay with such schemes till maturity.”
However, Uma Shashikant, managing director of Mumbai-based Centre for Investor Education and Learning, thinks a higher exit load would have been a better move for the investor. “Instead of eliminating exit loads and mandating the listing of such schemes on the bourses, an increase in exit load would have been a better option. Listing of the closed-ended funds will compromise the liquidity needs of the investor. Liquidity will depend upon the availability of a counter-party.”
Listing will also mean an increased burden on the asset management company. “FMPs are low-margin products and listing incurs a fee, which will put a financial burden and impact the yield,” added Shashikant.While the industry’s initial reaction has been positive, wait and watch how these new regulations impact the product category (of fixed maturity plans).
Source: http://www.financialexpress.com/news/sebi-debars-early-exit/395747/0
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