Understanding the four implications for an investor
Summary: A mutual fund closure can have various effects on an investor. They will be unable to redeem or invest further in the mutual fund, causing uncertainty.
All of us endeavour to protect our financial future, right? But sometimes, even the best-laid plans (or investments) may give you unexpected outcomes. You may have done extensive research before choosing a mutual fund. However, situations like geopolitical or bio-medical events, global economic changes can profoundly impact your mutual fund investments.
Fund houses, banks or AMCs have to make a tough call when there is low liquidity in the market or redemption pressure on a particular mutual fund scheme. Industry organisations such as SEBI and AMFI have regulations that allow these organisations to borrow a certain amount to meet their redemption needs. However, that may not be enough. In such a scenario, the bank, fund house or AMC may decide that mutual fund scheme closure is the best way to protect the interests of their existing investors. A mutual fund closure ensures that the value of the asset for unitholders is preserved. Furthermore, it ensures a disciplined and equitable exit for all the investors.
A mutual fund scheme closure is rare but holds significant implications for investors like you. Here are the mutual fund scheme effects on investors after it closes prematurely:
- All investments will remain locked-in:
You will not be allowed to redeem their mutual fund investments. Any Systematic Transfer Plans or Systematic Withdrawal Plans will be disallowed. So, if you need money to meet any significant expense, you will need to seek that cash from elsewhere.
- Investors cannot invest further:
You, as an investor, cannot buy more units of the mutual fund through SIPs or lump sum amounts.
- Investors will face the uncertainty of payments:
The bank, AMC or fund house will try their best to get you your mutual fund investments back as soon as possible. The exact time for that will vary; first, the organisation will distribute the money as and when the accruals come into the mutual fund. Second, it will attempt to liquidate the underlying investments that make up the mutual fund portfolio. The investor will receive a share of the liquidation based on the proportion of their holdings in the mutual fund.
- The investor may experience a generalised fear:
Just because one mutual fund scheme had to close, doesn’t mean that others will, too. However, you may fear so. It may lead you to withdraw your other mutual fund investments prematurely. Here, the mutual fund closure impact transcends from one mutual fund to another.
Thus, the mutual fund scheme effects on investors due to an unexpected closure can be far-reaching. However, you also need to be assured that a mutual fund scheme closure is not always unfortunate. Instead of making hasty decisions to redeem your entire portfolio, think long-term.
If you are worried about such a scenario of uncertainty, reach out to your fund manager to understand the nuances of the mutual fund closure impact on your investments and formulate a possible plan of action.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.