Sebi last week allowed mutual funds to list units of wound-up schemes on exchanges. Will this provide an exit route to investors stuck in shuttered schemes in future? Imagine, a Franklin Templeton like episode in future. Will investors in those schemes be able to sell their investments on exchanges and get their money back?
Well, the answer is a bit complicated.
First, let us look at the Sebi’s permission that many interpreted was to help investors in the six debt schemes of Franklin Templeton Mutual Fund. The house shut six debt schemes, citing the poor liquidity situation in the bond market due to the Covid-19 pandemic. According to the new Sebi rule, the units of the schemes that are in the process of being wound up can be listed on stock exchanges. However, trading on stock exchange will not be mandatory. The investors are free to opt for the AMC to complete the liquidation and refund process.
“There are certain roadblocks for retail mutual fund investors in the trading option. Even though, it is good that the investors can at least exercise this option, it is not very easy. Many investors don’t have a demat account. Even if you make one, the process of trading is not as simple as investing in mutual funds. This might be a tedious process for investors,” says Chokkalingam Palaniappan, Founder, Prakala Wealth Management, based in Chennai.
Let’s look at the process. First, investors will have to dematrialise the units or transfer them in their demat account. Investors will have to obtain a conversion request form (CRF) from the depository participant (DP). Statement of account which includes the names of mutual fund units to be converted to demat form needs to be attached with the conversion request form. The duly completed form along with documents must be submitted to the DP for conversion. After verification, the depository will send the form to the asset management company or its registrar and transfer agent, or RTA, which will confirm the conversion request after verification.
After the units are dematrialised, investors need a broking account to sell the units on exchange. A broker can help you get a matching quote in the market. However, this will mean spending some more money.
These roadblocks will be felt more by direct mutual fund investors with no help. In case, you have an advisor, she might be able to help you through the process.
Another major hurdle that investors may face is there wont be too many takers for the unit of shuttered schemes. “Even if you go and trade those units, it is generally when the scheme has been wound up and the news is all around. So, there will be no potential buyers of such units in the market. So, this entire effort of following process and trading might be futile for retail investors,” says Vishal Dhawan, Founder, PlanAhead Wealth advisors, a financial planning firm, based in Mumbai.
Third point which is an extension to the lack of buyers is the selling price. Financial planners believe that since no one would want to buy the units on exchanges, the potential buyers might quote very low price for these units. “With only a few people, if at all available, for buying these units, you might have to sell these units at cheap prices. It means you have made losses on your investment. There are possibilities of incurring losses in the AMC’s liquidation process also, but they are lesser and the process is easy. You don’t have to do anything,” says Vishal Dhawan.
Chokkalingam says that if investors have time in hand, they should control their urge of selling the units and stick to the AMC. “The AMC will keep on paying you the money that they receive in parts. If you are not facing an emergency, I would recommend waiting and letting the AMC return your money. However, if you are well-versed with exchange trading and you get a good price, by all means, go ahead and sell the units,” says Chokkalingam.