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Monday, March 17, 2014

How to do redemptions from FMP Funds earlier to maturity?

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FMPs operate over a certain period and terminate on a fixed date, but can be traded on the exchange

 

We are frequently asked if it is possible to get early redemption of the investment in an FMP fund. In theory, the answer is yes but in practice it's no. FMP funds are closed-end funds, meaning they have a certain period over which they operate and on a fixed, pre-determined date they are terminated, or as the term is, redeemed. In this aspect, they are no different from any other closed-end fund whether equity or debt.

 

However, SEBI's rules say that mutual fund companies must provide investors some route of early exit. For closed-end funds, this route is a listing on a stock exchange. If you wish to redeem a closed-end fund, the AMC is not obligated to buy the units from you and you will have to sell them on the stock market. That brings up the problem of who'll buy them.

 

The practical situation is that there is very little demand for FMPs or other closed-end funds and you are unlikely to find a buyer when you go looking for them. In 2013, with over 700 FMPs available in the market, only eight were traded on the BSE and nine on the NSE, on 20 days. Although this year the trading volumes exceeded few lakhs in a day, in the past years it has rarely exceeded few hundreds in a day.

Even if you find a buyer for your FMP, the price offered is likely to be lower than the intrinsic value (the NAV), and selling it so will lead to a loss. Therefore, you should invest in an FMP only with complete confidence money that you are investing will not be needed for the duration.

 

In this aspect, FMPs are inferior to bank fixed deposits. In fixed deposits, it is always possible to get a premature withdrawal only by losing some interest earned as penalty. In FMPs, it may be completely impossible to find a buyer, or, if you find one it may be at a price which also delivers a capital loss.

 

As a practical strategy, if you do face an unforeseen situation where you have a dire emergency and need the money that is invested in an FMP, consider taking a loan against the fund investment from a bank. As a last resort, this may be better than trying to find a buyer on the equity markets.

 

 

 

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

 

 

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