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Are Your Investments in Foreign Funds Safe?

The collapse of big Wall Street names and the nationalisation of AIG has led to a flood of investor queries about the safety of

In the last two days, I've received a large number of queries from worried investors about the safety of the money they've invested in funds run by foreign-owned asset management companies. This includes both wholly foreign owned ones like AIG, Fidelity and Franklin as well as those that are joint-ventures with foreign companies like DSP Merrill Lynch, Birla Sun Life, ICICI Prudential and Sundaram BNP-Paribas.

On the face of it such worries are understandable. Over the last few months, many big names have been revealed to be quite hollow. As I'm writing these words, news has come in that the AIG group, the world's largest insurer has, for all practical purposes, been nationalised by the US government, The company's top management is in the process of being sacked. Lehman Brothers has gone bankrupt and Merrill Lynch has been sold off in a distress sale to Bank of America.  Who's next? Nobody knows.

Here's what has been worrying investors: Tomorrow if Fidelity or Franklin or Prudential or Sun Life or BNP-Paribas or Morgan Stanley or any of the others go bankrupt or are nationalised or otherwise cease to exist, will there be any impact on the money that you've invested in their fund?

The simple answer is that your money is safe. In Indian law and accounting, there's a sharp distinction between the fund company's own money and the investors' money that it is managing. Investors' money does not even go to the fund company. The money stays with a custodian and is just invested under the instructions of the AMC's fund manager.

To take a concrete example, let us see what would have happened if Lehman Brothers had owned a mutual fund company in India. When Lehman went bankrupt, its creditors would have a right to the AMC's assets (like its offices for example). The creditors would not have the right to investors' money. In such a case, the AMC would either get a new owner or it would be wound up. In either case, investors would get their money back.

Of course, I'm not discussing any losses that your investments would make as a result of declining markets. That market risk of dropping NAVs remains for all funds whether they are run by an Indian AMC or a foreign one.

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