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What to do when Mutual Funds stop new subscription

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OFTEN mutual funds suspend new subscriptions for their schemes for a specific time. This leaves the investor confused about the overall position of the fund because he wants to put money in a particular fund because it is considered to be a good investment.

However, if there are no investment options, then, there is a need to search for alternatives. In such a situation, there is a need for the entire matter to be sorted out carefully by looking at the exact conditions and available choices.

Wait for investment opportunity: There are different ways by which this kind of situation can actually be implemented by a mutual fund. One of the ways to do this is to just announce that there will not be any new investments accepted by a particular fund and there could be some time period before this restriction is lifted. In such a situation, the investor will have no option but to wait till the time that the time period passes, and then, consider the investment, when the window opens up again. The risk here is that there is no way of knowing when the chance to invest would actually come up again. The second way by which this is implemented is through saying that the lumpsum investments will not be accepted, but, there will be systematic investment plans that can be started by making a regular contribution or investment to the particular fund.

Large corpus: One of the reasons why this kind of situation arises is due to the fact that the fund has already gathered a large corpus. In fact, the corpus could be bigger than what the mutual fund wants.

Managing a large corpus has its own share of problems, and hence, there is a fine balancing act that has to be maintained by the fund as to how big they will let the fund grow before they stop new subscriptions. The problem becomes extremely serious because even taking a small share of the portfolio in the fund will require very large purchases to be made by the fund manager that might not be an easy thing to do.

Mid-cap space: There could also a problem that fund managers face when a fund is either focused on a particular sector or when it is a mid-cap fund.

If the focus is on a specific sector, then the fund can purchase just a few companies in the portfolio and a high corpus can put pressure on the fund. This is a tough thing for the fund managers because they will not get the required investment opportunities. On the other hand, there can also be mid-cap funds where the investment opportunities will not be high for a large number of stocks because they have low liquidity, thus, making stock transactions difficult.

Overall decision: The step to actually cut down investments into the fund is meant to benefit investors, and hence, they need to see the situation in the proper perspective.


They have to understand the reasons behind the discontinuation of investments because that would enable them to get a better picture of why this is being done and how they will benefit from it. At the same time, this period should be used for the purpose of firming up a particular strategy that will enable the investor to make the best use of the situation going forward

 

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