As per the Securities and Exchange Board of India’s (Sebi) guidelines, an asset management company (AMC) has the right to stop buying and selling units of a particular mutual fund (MF) scheme during a specified time period. During this period, known as the shut-out or book closure period, you can’t invest or redeem even if it is an open-ended fund. This is applicable mainly on dividend options.
How long it lasts
It can’t exceed five days. An AMC can announce a shut-out period on monthly, quarterly, half-yearly or yearly basis. Also, AMCs reserve the right to shift the dates for the shut-out period.
The announcement for the shut-out period is made on AMCs’ website and at least two newspapers. AMCs can also change the dates for the period.
What’s the need
Some AMCs announce a shut-out period whenever it has to pay a dividend. However, the practice of announcing shut-out period at the time of processing dividend has decreased in recent years.
AMCs may also announce shut-out period if there is a fundamental change in any scheme or if the scheme is merged into another scheme. For instance in case of a merger, the expense ratio may rise or fall or the scheme may start investing in a different category of stocks. Such a move may lead to volatility—some investors may want to exit while others may want to increase the investment. High volatility may make the job of reconciliation—a process to ascertain in-flows and outflows—tougher. To avoid such volatility around the record date (the date on which schemes will be merged), companies sometimes announce a shut-out period.
What happens if you apply for units during this period
The AMC will accept your application during this period, but units will be allotted at the net asset value (NAV) applicable on the first business day after the shut-out period gets over. For instance, if the shut-out period is from Monday to Wednesday and you apply on Tuesday, you will get units allotted at NAVs applicable for Thursday. However, AMCs do not announce NAVs during the shut-out period.