A NUMBER of close-ended funds were launched several years ago and slowly the lock-in time period (usually three to five years) of the funds is coming to a close. In such a situation, there are two options that are usually followed by the mutual fund.
The first is to return the investors' money at the applicable net asset value (NAV) and the other is to convert it to an open-ended fund. This will ensure that the fund continues to be in operation.
A lot of funds are opting for the second route and this requires a specific strategy on the part of the investor to tackle the situation.
Change:
The investor has to recognise that there has been a change in the nature of the fund. Earlier the fund was a close-ended fund, which meant that new investors could not enter the fund and exit was also prohibited except at specified time periods. While the existing investors remained with the fund providing stability, there is a different situation now as any investor can enter and exit the fund.
For individual investor, this gives rise to the choice to quit their investment when they want to.
Option:
The conversion of a fund to an open-ended one gives an option to the investor to exit the investment and it does not mean that they are forced to do anything. Unlike a situation where the fund is redeemed and the money is given back, here it gives the choice to the investor in case they want to exit the investment, the time period when they want to exit or even if they want to put additional money into the investment. This choice has to be made carefully and after a proper study of the existing situation of the fund along with the implications of the move.
Objectives:
The initial investors who have invested their money into the fund had an idea of the situation that they would face because the close-ended nature of the fund was laid out at the time of the new fund offer. At that point there was most likely a specific target or aim of the investor and if that target has already been achieved, then it might make sense for the investor to exit the investment and then look at what they need to do further with the money.
Evaluation:
This brings us to a situation where the individual will need to evaluate the option that is in front of them and see whether the fund is actually performing well. This will require taking a look at the absolute performance as well as the relative performance of the fund over the past several years.
The way in which it has been able to tackle the tough times also needs to be highlighted, as it will lay out the exact manner of operation of the fund. If the fund is doing better than the alternative options then this is a positive factor for continuation of the investment. There should also be a careful look at the portfolio of the fund so that it shows the kind of potential that is present in the fund.
Special features:
The additional features of the fund, such as the philosophy behind the management of the funds and the kind of tenure that the fund managers have with the fund, are also important. There has to be an element of stability that is present in the management of the fund for investor confidence to be high. No action will mean a default choice of the existing fund. There is always the choice of taking the money and walking away and the good part is that any gains are likely to be tax-free because the holding period has crossed the 12-month requirement to be classified as long-term capital gains.
