Closed ended funds such as FMPs have early withdrawl banned by SEBI

December 5, 2008 by  

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Close ended funds including FMPs are to be held till maturity

close ended fundsNew SEBI norms will bar close ended funds such as FMPs, otherwise known as fixed maturity plans,from allowing investors to withdraw their money before maturity>

Going forward, corporates and retail investors will be allowed to liquidate their closed ended funds only at the time of maturity

Close ended funds such as FMPs have come under SEBI scrutiny following the liquidity crunch that Mutual funds have faced recently

The recent panic premature withdrawl from close ended funds such as FMPs due to doubts about their asset quality of the portfolios of the close ended funds, had caused a major crisis in the mutual fund industry. Due to the liquidation pressure on close ended funds,RBI had to step in and offer a credit line of Rs 60000 crore to commercial banks in order to lend to the crisis ridden mutual fund industry

Close ended funds such as fixed maturity plans (FMPs) typically had a penalty to prevent early withdrawl but that obviously was not good enough

Close ended funds now will no longer offer a high penalty for early exit – in fact close ended funds will become almost illiquid since close ended funds such as FMPs cannot be redeemed before maturity. This will ensure that the close ended funds are not subject to panic selling, leading to a huge liquidity crisis for mutual funds

Exiting close ended funds to be possible only through the stock exchange

Close ended funds such as FMPs will now be forced to list on the stock exchange. These close ended funds can be exited only through the stock exchange , and not through investors demanding early withdrawl from the mutual funds

New norms on close ended funds such as fixed maturity plans to also ensure control on underlying assets

Close ended funds such as FMPs , can now hold underlying debt portfolios. who maturity will not exceed the maturity of the close ended fund itself. This will prevent short term close ended funds from holding debt assets that have longer maturities and exposed to higher level of credit risk

These new norms on close ended funds and fixed maturity plans to be applicable on all new close ended funds that are approved but not yet launched

All new close ended fund IPOs from mutual funds will have to follow the new norms for early withdrawl, as issued by SEBI. This will ensure that close ended funds such as fixed maturity plans are now finally under the radar of SEBI as SEBI tries to solve the liquidity risk to the mutual fund industry

Close ended funds may lose their current popularity due to SEBI’s recent norms, leading to more illiquid FMPs

As a result of SEBI’s norms, close ended funds may lose their popular status and it could be some time before investors and corporates start dumping all their money in FMPs again

The close ended FMP vs FD battle now may temporarily be won by bank fixed deposits as some HNIs may be reluctant to invest in close ended funds such as FMPs due to liquidity concerns

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