The Securities and Exchange Board of India's decision to restrict early exits from close-ended funds will reduce the attractiveness of Fixed Maturity Plans (FMPs), experts said.
At present, investors exiting a closed-ended scheme such as an FMP before maturity can do so by paying a load of 2-6 per cent of the net asset value (NAV). Under the new norms, they will have to sell through the stock exchanges after listing.
The only catch is that there is no secondary market for these schemes, in terms of players. So any investor who wishes to sell will have to find a buyer, and sell it at a huge discount if the scheme is maturing say, a year later. Also, experts point out that many retail investors may not be registered with a broker to take advantage of this.
The Rs 1 lakh crore FMP category could be hit the most by this move because many investors put money knowing that they can exit in the interim. And in the last couple of months, quite a few have done so. The average assets under management (AAUM) of FMPs fell by over Rs 30,500 crore in these months. It seems that the market watchdog has taken cognizance of this.
According to A Balasubramanian, chief investment officer, Birla Sun Life Mutual Fund, this will help fund managers to construct the portfolio, according to the requirement of investors. “We will go back to the years 1996-99, when investors faced interest rate risk in open-ended debt funds and there was certainty of returns in closed-ended funds,” he said.
Some fund managers believe that hiking exit loads would have been a better option as it would have acted as a deterrent. Making these schemes completely illiquid could drive away investors. The Association of Mutual Funds (Amfi) in a discussion paper last week had suggested imposition of a higher exit load rather than listing because of a lack of liquidity.
More From This Section
According to Parijat Agarwal, head (fixed income), SBI Mutual Fund, corporates who are big investors in FMPs will have to do better liquidity assessment in the new scenario.
“This move could even revive the bond fund market as longer-term investors would prefer to put money in them,” added Balasubramaniam.