When mutual funds say no to your money

Under what circumstances do mutual funds stop accepting your money?


iStockPhoto
iStockPhoto

Effective 20 February, you will not be able to invest in DSP BlackRock Micro Cap Fund (DMCF) as it has suspended the sale of fresh units for both lump sum investments and systematic investment plans (SIPs). This is not the first time a mutual fund is saying it doesn’t want your money.

No opportunities

Smallcap funds often find it challenging to buy a meaningful chunk of shares, in line with how much the fund managers think these companies would grow.

At the same time, she has to also ensure she doesn’t end up buying an usually large chunk of the company either. The problem compounds, as such companies usually have few buyers and sellers. If the fund manager sells under duress, it could hamper performance. Let’s take an example.

DMCF aims to invest in companies with market capitalization (market cap), when compared to all other listed companies, ranked 301 and lower. Assume the fund manager wants to invest in the 350th-ranked company: Jet Airways (India) Ltd. If she wants to invest 3% of the existing corpus (about Rs5,000 crore), she would need to deploy Rs150 crore. She would end up buying about 3.64% of the company (Jet’s market cap is around Rs4,117 crore), or about 4.2 million shares, at the current price of Rs355.70. That’s a sizeable chunk but can she even buy so many shares outright? Perhaps, not.

On 15 February, shares of Jet Airways worth just Rs58 crore were traded on the National Stock Exchange. While the fund manager can afford to buy the required quantity over several days, should a crisis unfold, she might not be able to sell fast and the lack of liquidity can send the prices—and the fund’s net asset value—spiraling down.

“It was increasingly difficult to buy enough shares in companies without affecting price. Once we find investing opportunities, we may reopen the fund,” said Vinit Sambre, DMCF’s fund manager.

More fund houses are halting sales. IDFC Premier Equity Fund has regularly suspended sales of fresh units since its launch in 2005. In October 2016, Mirae Asset Emerging Bluechip Fund stopped accepting lump sum amounts; existing SIPs were allowed, but fresh ones were limited to Rs25,000 a month. Other examples are Franklin India Prima Fund (between February and May 2006) and Reliance Growth Fund (2005 and 2006).

What you should do

DMCF’S past 5-year return has been 30% on a compounded basis. For existing investors of DMCF, we suggest you stay invested.

“A fund manager is the best person to decide the optimal corpus that can be deployed without diluting fund strategy,” said Roopali Prabhu, head of investment products, Sanctum Wealth. “If the fund is likely to suffer due to fresh inflows, it makes sense to close the doors. They should keep the interest of existing unitholders in mind,” she added.

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