What happens to money invested, If a mutual fund scheme is wound up?
When it fails to meet the requirement of minimum assets
On winding up of a scheme, the mutual funds pay a sum to the investors
The winding-up of a mutual fund scheme is never good news. It involves the sale of all of a fund’s assets and the distribution of the proceeds to the fund unitholders. Actually, as an investor, you are forced to sell at a time, though not willingly. In the worst case, you may suffer a loss and pay capital gains taxes too.
Why mutual funds wind up?
There can be many situations for which a mutual fund may wind up a scheme, including the following:
- There may be a failure on the part of the asset management company to manage the scheme.
- The poor performance ranking is one of the primary causes. It reduces asset flows, and it also brings down the track record of the fund house.
- A scheme may also be wound up when it fails to meet the requirement of minimum assets. All open-ended debt-oriented schemes have to maintain minimum assets of Rs 20 crore at all times, according to mutual fund regulator Securities and Exchange Board of India (SEBI).
- A close-ended scheme shall be wound up after the expiry of its fixed duration unless it is rolled-over for a further period.
- A mutual fund scheme may be wound up if on the happening of any event, in the opinion of the trustees the scheme is required to be wound up or 75% of the unitholders of a scheme approved in a resolution that the scheme is wound up, or the Board decides so in the interest of the unitholders, after repaying the amount due to the unitholders.
How are investors informed about wound up?
The Board of Trustees is appointed by the AMC (sponsor) and is subject to the approval of SEBI. However, the trustees cannot be appointed from the same group to which the AMC belongs.
How are investors informed about wound up?
When a scheme is to be wound up, the trustees shall give notice to the Board, in two daily newspapers that have circulation in whole India, and in a vernacular newspaper that is circulated at the place where the mutual fund is formed, disclosing the circumstances that lead to the winding up of the scheme.
What are the effects of winding up?
The trustee or the asset management company depending on the case shall cease to continue business activities of the scheme so wound up; cancel units in the scheme; redeem units in the scheme on and from the date of the publication of the notice.
What is the process of winding up?
- The unitholders in a meeting called by the trustee, authorise the trustees or anyone else to carry out the winding-up process by voting at the meeting and approving the resolution by a simple majority. However, if the scheme is wound up at the end of the maturity period of the scheme, the meeting of the unit holders shall not be necessary.
- The trustee or the authorised person shall dispose of the assets of the scheme in the best interest of the scheme’s unitholders.
- The proceeds of sale realised shall be first utilised towards the discharge of outstanding and payable liabilities under the scheme.
- Then appropriate provision is made to meet the expenses connected with winding up.
- Lastly, the balance shall be paid to the unitholders in proportion, with respect to their interest in holdings of the scheme as on the date of the decision taken for winding up.
What happens on the completion of the winding-up process?
On the completion of the winding-up, the trustee shall forward a report to the Board and the unitholders containing particulars such as-
- circumstances leading to the winding-up;
- the steps that are taken for disposal of fund’s assets before winding up;
- expenses incurred by the fund for scheme’s winding up;
- available net assets for distribution to the unitholders; and
- a certificate from the fund’s auditors.
Winding up of the scheme-the end
After the receipt of the report, if the Board is satisfied that all measures taken for winding up of the scheme are at par with compliance, the scheme shall cease to exist.
What will you get as an investor?
On winding up of a scheme, the mutual funds pay a sum to the investors based on the NAV at that point after adjusting the expenses. Unitholders are entitled to receive a report, as mentioned above, on winding up from the mutual funds with all necessary details.
How can you redress your complaints, if any?
The mutual fund offer document contains the name of a contact person to whom you may approach if you have any queries, complaints, or grievances. The names of the directors of AMC and trustees who monitor the activities of the mutual fund are also given in the offer document. Investors should approach the concerned Mutual Fund or the Investor Service Centre with their complaints.
If the complaints remain unresolved, you may approach SEBI for facilitating the redressal of your grievances. On receiving the complaints, SEBI enquires the concerned mutual fund and follows up with it regularly.
At the bottom line, mutual fund closures are not extraordinary events, and it may happen as part of the fund industry’s natural business cycle. Remember, the closure of a scheme is not the end of the world. Learn from the experience and take the help of a professional advisor to redeploy your assets in funds with long track records of success that you can avoid your exposure to these kinds of unwanted occurrences.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.