Why do MFs stop accepting fresh money?
NEW DELHI: Effective February 20, you will not be able to invest in DSP BlackRock Micro Cap Fund (DMCF). The scheme has suspended sales of fresh units. This is not the first time that a mutual fund scheme has done so. Why does a fund take this unusual step? And what does this mean for your investments?
LACK OF INVESTMENT OPPORTUNITIES
Your fund’s mandate is to invest your money in the equity or debt market, depending on what it has set out to do. But it’s equally important for your fund manager to ensure that she can get out in time if she wants to, and at the price of her choice. During volatility, this becomes a problem if the company is a small one and your fund manager wants to sell the company’s shares but there aren’t enough buyers. In this case, your fund manager sells in duress and this leads to a bigger loss. At the same time, your fund manager also has to ensure that she doesn’t end up buying an usually large chunk of the company either. Let’s take an example.
DMCF aims to invest in companies whose market cap, when compared to all other listed companies, is ranked 301 and lower. Assume the fund manager wants to invest in the 350th-ranked company by m-cap: Jet Airways (India) Ltd. If she wants to invest 3% of the existing corpus (about ₹5,000 crore), she would need to deploy ₹150 crore. With that amount, she would end up buying 3.64% of the company (Jet’s market cap is ₹4,117 crore), or 42.17 lakh shares, at the current market price of ₹355.70. But can she even buy so many shares outright? Perhaps, not. On February 15, shares of Jet Airways worth just ₹58 crore were traded on the NSE. While the fund manager can afford to buy the required quantity over a number of days and months, should a crisis unfold, she might not have the luxury to wait for as long to sell. Here, lack of liquidity can send the prices — and the fund’s net asset value — spiralling down.
The bigger problem is this: in this example, if the fund manager wishes to buy 3% but ends up buying just, say, 1% of the company, and then later the share price rises the way she had predicted, her gains, too, would be limited.
NOT THE FIRST TIME
IDFC Premier Equity Fund has regularly suspended sales of fresh units since it was launched in 2005. In October 2016, Mirae Asset Emerging Bluechip Fund stopped accepting lump sum amounts. Other examples of funds that have periodically stopped taking fresh money are Franklin India Prima Fund (between February and May 2006) and Reliance Growth Fund (2005 and 2006).