Ramesh Pathania/Mint
Ramesh Pathania/Mint

DYK: An open-ended fund can also shut down

Your fund house is not mandated to take your consent before closing down a scheme as the minimum corpus size requirement of `20 crore is a regulatory requirement

On 1 July, Taurus Asset Management Ltd announced it will shut down one of its schemes—Taurus MIP Advantage (TMA). The reason TMA is shutting down is that its half-yearly average corpus has fallen below 20 crore. As per a directive issued by the market regulator, Securities and Exchange Board of India (Sebi), in June 2014, debt and hybrid schemes (those that invest in both equity and debt instruments) must maintain an average corpus of 20 crore on a half-yearly rolling basis. If the corpus falls below this mark, the scheme must scale up to meet the basic requirements, within a period of six months, or wind up. Taurus Asset Management has chosen to wind up the scheme. This fund will be closed most likely in July and money will be returned to the investor at a particular day’s net asset value.

CHANGE IN RULES

TMA was launched in August 2010. For the first three years, its size hovered between 60 crore and 88 crore. However, from then on, its corpus started to fall, consistently. By the end of December 2013, 2014 and 2015, its size was 37 crore, 15 crore and 13 crore, respectively. As per data by Accord Fintech, an MF tracker, the scheme’s month-end corpus touched a low of 9 crore at the end of March 2016.

Overall, the category of monthly income plans (MIPs), too, hasn’t been impressive. Since 2010, the assets in this category have dropped significantly. In September 2009, the collective size of MIPs was 725 crore. As on May 2016, their size stood at just 391 crore.

In 2014, say fund industry executives, Sebi formed an opinion that since it is essential for MFs to diversify their underlying holdings, small-sized debt funds don’t make sense since there is typically a requirement of a minimum lot size to buy debt securities. For instance, corporate bonds are traded in a lot size of 5 crore and money market instruments such as certificates of deposit or commercial paper are traded in a lot size of 25 crore.

A small-sized fund may not, therefore, be able to have sizeable holdings in its portfolio. Fund executives estimate that 30-35 debt and hybrid funds have been shut down so far for not meeting the average size rule.

To make matters more complicated for such small-sized funds, earlier this year, Sebi tightened debt fund norms further. It said a debt fund cannot invest more than 10% in a single issuer (down from 15% earlier). With trustees’ approval, this limit can go up to 12%. If the rules require the funds to diversify more, a small corpus makes it difficult for the fund manager to manage the fund.

WHAT SHOULD YOU DO?

There isn’t much that you can do. Your fund house is not mandated to take your consent before closing down a scheme as the minimum corpus size requirement of 20 crore is a regulatory requirement. But take this as a piece of good news and walk away with your money. Size does matter in a debt fund. Small funds tend to get stuck with illiquid scrips in times of volatility and returns can get hampered too.

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