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THERE are different types of mutual fund (MF) offerings in the market and the working of these schemes are governed by the guidelines specified by the market regulator. While there has been quite a few changes related to equity-oriented funds that have attracted investors’ attention, it is also time to look at some of the regulations that will impact debt-oriented mutual funds, especially interval funds.
Interval funds will follow new guidelines that will be applicable for existing funds from April 1, 2011, or the next specified transaction period, which ever will be later. New funds will have to incorporate the features in their offerings.
Interval funds: Interval funds have features of both close-ended as well as openended schemes. These are in operation for an indefinite period of time, so, in that sense, they are open-ended in nature. But at the same time, entry and exit is not permitted at all points of time. This means that there will be certain periods after which the investor can enter or exit the fund for a few days and this gives it some characteristics of closeended funds, too. Since there is a specific time interval like 90 days or 180 days after which the transactions will be permitted they are known as interval funds.
These are launched by MFs as they provide a convenient way of providing an investment option with a single fund instead of launching new schemes at regular points of time.
Restriction of exit: There are several interval funds that allow investments only on specific days after a given interval, while exit is permitted on all days. This creates a difference in the impact for the investor depending upon the time when the exit is made.
This happens because of conditions that specify that there is no exit load for the exit made during the specified period after the given in terval. On the other hand, there is some exit load when exit is made on a day other than the specified period.
This feature deviates from the general condition , as it provides an exit option at some point and this can be detrimental to investors.
Under the new guidelines, the market regulator has now asked MF houses to not allow such exits and open the exit option only during specific times. At the same time, to ensure that investors have enough liquidity, the scheme will have to be listed on stock exchanges.
This brings interval funds at par with the fixed maturity plans in terms of features.
Working: There are a couple of more conditions that has been made applicable for the interval funds. Along with the fact that the scheme will not allow new investments or redemption except during a specific time period, there is a minimum time period applicable now. This minimum time period is for two days during which the investment and redemption option has to be kept open for the investor. This will give the investors enough time to take a decision. The second point is that the minimum duration will have to be 15 days. So the interval after which the fund opens for investment and redemp
tion has to be at least 15 days. In both the cases the minimum period has been suggested and not the maximum time period, so that the fund house can choose different time periods that suits their requirements.
Holdings: At present, there are no restrictions on the various holdings that will be present under interval funds. Due to this reason the fund can invest in any securities and the risk here is that it can give rise to an asset liability mismatch. Under new norms, the scheme will not have any holding that will mature after the opening of the fund for the next period.
(The writer is a CA and Certified Financial Planner)
Source :- mydigitalfc |
