Recently some of the mutual funds had announced their plans to exit from India. What could be the impact of such developments on the NAV of these schemes? What should an investor in these schemes do in such a situation?
A.B. Mehta, via e-mail
Mergers, takeovers, folding up operations etc are common to all industries and the mutual fund industry is no exception. News of closure or takeover is likely to cause investors some anxiety. But with market regulator, SEBI ensuring high transparency and disclosure requirements, you do not need to panic about closure of your fund. Your money is not going to vanish.
The structure of mutual funds in the first place ensures investor protection. A mutual fund is a trust where the trustees act as protector of unit holders' interest. The trustees appoint the custodian to keep your investment in the form of securities. So the money you have invested is not with the asset management company (AMC), which only plays the role of managing your money professionally, but it is in the safe hands of the custodian. All funds have a compliance officer who is appointed to ensure that funds are being managed according to regulations laid down. A compliance officer has the right to supersede management and report to SEBI in case of a problem.
Let us look at two situations. In the first case, a fund decides to terminate its operations and in the second, the fund sells a scheme to another fund. In the first case, the trustees have to give notice explaining reason for winding up to the board. The notice also has to be published in two national dailies and in a vernacular newspaper where the fund is formed. Hence, investors are always made aware of such developments. A merger or takeover of schemes represents a change in the fundamental attributes of a scheme. An AMC has to take the permission of 75 per cent of unit holders or allow them to redeem without any exit load.
Does that mean that an investor like you has nothing to worry about? Certainly not. What you should worry is the future management of your investment. Here you need to find out whether the investment is going to be managed by a different mutual fund and if this suits your investment objective. This is because all AMCs have a different investment style and fund philosophy. Though the objective of the scheme may remain the same, the manner in which it is achieved can vary.
So, what does one do under the situation? You need to find out more about the mutual fund that is buying the scheme. Also check out the past performance of similar schemes that it has managed and if it suits your risk-return profile.
If you feel that fund returns are a product of specific portfolio managers, find out if they will continue with the new entity. If this is the case, there would be greater chances that the past performance may be replicable in the future. If you are, however, uncomfortable with the new management and its style of investing, you always have the option to redeem your investment and look for other suitable avenues.
This article was originally published on March 25, 2003.
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