Opening Up Exit Routes
Why? You heard them asking. That was the initial reaction to the proposal to make it optional for the funds to list open-ended funds, as suggested by the Mutual Fund 2000 report. This single proposal has hogged more attention than any other measure, be it ensuring fair practice or transparency.
At first, many treated it as a joke. A frequent comment being, In any case an open-ended fund provides an exit route. Then, why should there be another way out, that too, in the form of stock market, where mutual funds are battered by heavy discounting. Moreover, what difference will be there between open and close-ended funds?
At the end of the day the reactions varied. The investors assumed that it was just another ploy to serve the AMCs.
The logic offered was with another exit route the fund manager will not have to part with the money. Naturally, fund managers came forward with an explanation: A stable corpus means efficient deployment of funds and better returns.
Says Ashok Pradhan, chief executive, GIC Mutual Fund, With this corpus, the funds can ensure some stability in their schemes.
nListing: Historically, close-ended funds are listed in the stock exchanges and traded till they are redeemed. On the other hand, open-ended funds will provide repurchase facility during a chosen period every year.
In a nutshell, unlike in the former you will be dealing solely with the fund. Argues B Framroze, CEO, Credit Capital, There is nothing wrong in the move. It will provide an option for the investors. Moreover, listing in the exchanges will assure easy accessibility.
What prompted this measure? Historically open-ended funds were always drubbed during redemption periods. The outgoes surpassing assumptions busted many calculations of fund managers, resulting in a dip in the net asset value (NAV).
Adds Pradhan, Earlier, heavy repurchase would upset the calulations of the funds and even the portfolio was not intact. Disagrees Framroze, There is no question of a fixed corpus in an open-ended fund.
How will you benefit? The funds chorus: One more exit route. Otherwise, your open-ended fund offers repurchase facility periodically. Instead of that, now you have another way out: selling off your units at the market. That too, throughout the year. Isn't it good news?
Arbitrage: Moreover, imagine this scenario. The repurchase price offered is lower than the market price. You can turn to the maket for the exit and make some money. But wait. Don't run to the nearest exchange. This scenario painted by punters is very unlikely. Till date, mutual funds have been suffering heavy discounts in the market. True, in open-ended schemes it is not as high as close-ended ones. Still, the instances of arbitrage seem unlikely.
Says Divyesh Desai, research manager, Shriram Mutual Funds, The discounting will come down. However, it is true that any mismatch between the prices will result in chaos.
Imagine. The units are available at a far lower price than the repurchase price offered by the funds. A shrewd investor can buy them from the market and off load them at the funds to make some money.
Admits SC Bhatia, managing director, ICICI AMC, Arbitrage is a distinct possibility. There is nothing we can do about it.
Exit load: In addition, some funds have an in-built exit load on their schemes. This will apply only if you approach the fund for repurchase. Avoid it. Sell your units in the market and bypass the load. Reasons Pradhan, In any case these are very nominal rates. It will not make much difference.
If a fund plays hide and seek, when it comes to repurchase of units use the other route. Sadly, admits Bhaita, investor service is not as good as it should be in this industry. Mostly, the repurchase procedures takes about a month to compete.
In such cases, you can opt for the maket route if it is less time consuming. But be prepared for invisible snags: everything on paper does not always translate into actuality.