A Free Look Puzzle | Value Research A government committee has recommended a free look period for mutual funds, but funds already have a permanent free look
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A Free Look Puzzle

A government committee has recommended a free look period for mutual funds, but funds already have a permanent free look

A couple of weeks back, a government, with the self-explanatory name of "Committee to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products", released a large set of recommendations. These are targeted at product structure, costs, commissions and disclosures for mutual funds, ULIPs, insurance and NPS.

While most of the recommendations are sensible and well-targeted, there's something in the report regarding mutual funds that is more than a little puzzlement. The committee recommends that SEBI should enforce a 'free look' period for mutual fund investments. This free look is a concept from insurance which is basically a 15-day money back period during which an insurance customer can return the policy if he or she doesn't like the terms and conditions attached to it. This is needed because once a policy commences, the customer is locked in for years. Of course, the free look period is not actually free because as the IRDA website states, premia are returned after deducting the cost of risk cover for the period and any stamp duty.

The idea of bringing in a similar regulation for mutual funds is a little strange because mutual funds have what is effectively a permanent free-look period. A vast majority of the money invested in funds is in open-ended funds where investors can redeem their money at one to three days notice. Even in closed-end funds, SEBI rules ensure that there is some route for liquidity. Basically, a free look like the one in insurance means that investors can redeem their money minus expenses at any point, something which is already there in mutual funds.


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