Do mutual fund schemes have lock-in?

Read my article on the above subject in Mid Day, Gujarati edition today.

Here is the link to the article.

The English translation of the article is as under:

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Lock-in period in a mutual fund

“For how long does my money remain locked in a mutual fund scheme?” or “What is the lock-in period in mutual funds?” Someone asked the other day.

Well, there are many misconceptions floating around in the market regarding mutual funds. The above questions seem to be arising out of these. One of the most ignored misconceptions, yet among the most common one, is that all mutual funds are same. Many people think that all mutual funds have the same features and that they all behave in the same exact manner. Hence, an investor should expect the same experience with all mutual funds. The reality is quite different.

We have time and again highlighted in our previous columns that there are many varieties among mutual fund schemes and that investors have a huge amount of choice from the type of mutual fund schemes to various features among similar schemes.

Today, we would attempt to address the questions asked in the opening paragraph. A lock-in period is an operational feature of many investment options and schemes. Lock-in means the investor cannot access the money, or cannot sell the investment and convert into cash.

Now, certain mutual fund schemes do have a lock-in period, whereas some do not. There are also schemes without lock-in where redemption from the scheme is discouraged by putting some charges.

First of all, there are schemes like ELSS or some of the retirement funds or even children’s funds, which have a lock-in period. In case of ELSS or retirement funds, where the investor can avail of tax deduction by investing in such schemes, there is a statutory lock-in period. After the statutory lock-in period is over, the investor is free to take the money out on any business day or stay invested for as long as one wishes to. You are also allowed to add more money in the same account even during the lock-in period of the earlier investments. However, the new (or fresh) investments would attract lock-in from the day of investments. For example, in ELSS schemes, the mandatory lock-in is for three years from the date of investment. So, your investment made in March 2017 would be locked in till March 2020, but additional investment in the same account in May 2017 would be locked in till May 2020.

The next category we must understand is the close-ended funds. These funds have a defined maturity period. At the end of this period, the funds are automatically returned to the investors. Before maturity period, the investor cannot get the money back from the fund. However, as per SEBI regulations, the units of close-ended funds have to be compulsorily listed on a recognized stock exchange, which may allow liquidity to the investors.

Then come the open-ended funds. In these funds, there is no lock-in period. An investor can buy the units or redeem the funds on any working day. However, in case of some of the open-ended funds, there could be an exit load if the investor exits before a certain period from the date of investment. There are no fixed rules about such periods, and the exit load as well as the period may change for the same scheme from time to time. However, as an investor, you must know that what exit load was applicable at the time of your investment would apply to that particular investment. Any subsequent change in exit load would not be applicable to your old investments.

So, there is no general answer to the questions asked in the opening paragraph. Understand the type of fund and check the fund details at the time of investing.

You enjoy your holidays and your money works for you, is it possible?

You enjoy your holidays and your money works for you, is it possible? Read my article on the subject in Mid-day Gujarati edition today. ________________________________________________________________________________ English translation is as under: How does it sound when your money works for you even when you are enjoying your holidays? August is the month of festivals and long weekends. Many of us go for mini-vacations – either on some excursions or to meet our families. During such periods, often the money lies idle in the bank accounts. There are no options where the money can be parked to earn some returns. Bank fixed deposits are available for a minimum period of 15 days if the amount is small. That means, the money remains idle in savings or current accounts. With most banks, the current accounts do not earn a single rupee and the interest on savings accounts is a low 4% p.a. In such cases, mutual funds offer an incredible opportunity in form of liquid funds. It is possible to invest amounts as small as Rs. 10,000 and even for weekends. Many large companies use this facility offered by mutual funds to park money for weekends. The liquid funds are open-ended mutual funds and hence the transaction can be done on any business day. Let us say, there is a holiday on a particular Monday, making it a long 3-day weekend – Saturday, Sunday and Monday. If you have surplus money in your bank account on Friday before these holidays, you can invest the same in a liquid fund and simultaneously file for redemption such that you get the money in your bank back on Monday. In case you do not need the money on Monday, you may continue to stay invested. Mutual funds offer a great flexibility in terms of not declaring the investment period in advance. You may invest your money in a liquid fund without mentioning the date of redemption in advance. You may stay invested till the time you do not need the money. As per the website of Value Research, a leading portal for mutual fund information, the liquid funds have delivered the following returns in the past: Table 1: Period Returns (p.a.) Last week 6.76% Last month 7.08% Last 3 months 7.36% Last year 7.83% (Disclaimer: Past performance may or may not be sustained in future) As you can see, the rates of return are around 7% p.a. However, you may also observe that the returns for the shorter periods are lower than the longer periods. This is not like a bank fixed deposits where they offer lower interest rates for shorter periods and higher for longer periods. This has happened in case of liquid funds since in the last some time, the interest rates have come down. Liquid fund is a product that responds to the changes in interest rates in the market very fast. If the interest rates in the economy start going down, the liquid fund returns would get adjusted and if the rates start going up, the liquid fund returns would improve. Let us do some Math with the above numbers. If you have a surplus of Rs. 5 lacs to be invested for a long weekend (3 days), how much do you earn? Table 2: Assumed rate of return Money earned 6.76% Rs. 277.81 7.08% Rs. 290.96 7.36% Rs. 302.47 7.83% Rs. 321.78 (The rates of return are taken from table 1) If you do not need money, as we mentioned earlier and you keep the money in a liquid fund for 10 days, the earnings would be as under: Table 3: Assumed rate of return Money earned 6.76% Rs. 926.03 7.08% Rs. 969.86 7.36% Rs. 1,008.22 7.83% Rs. 1,072.60 (The rates of return are taken from table 1) If in a year, you get four to five such opportunities, we are now talking about serious money. Liquid funds also offer facilities to transact through SMS, increasing the convenience. In fact, just before writing this article, I invested some money in a liquid fund just by sending an SMS. The redemption from the fund account also happens through an SMS. All you need to do is to get a one time mandate registered. So, what are you waiting for? Enjoy your holidays and let your money work for you. The earning would take care of part of the expenses. -        Amit Trivedi The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

What to see while selecting a liquid fund to invest in ...

What should one consider while selecting a liquid fund? Read my article in Mid-day Gujarati edition on 22nd February here ...

http://www.gujaratimidday.com/business/expert-opinion/expert-views-on-mutual-funds-15


The English translation is as under:

Sometime ago, we saw what to look for if one wants to compare two or more different equity funds. Today, we will discuss how to choose a liquid fund (or ultra-short term bond fund – most retail investors may be fine with the latter and in this article, we will use a common term “liquid fund” for both these categories). In order to decide on the selection criteria, it is important to first identify the objectives for parking money in a liquid fund.

Primarily, there are three reasons why people use liquid funds, (1) as a contingency fund, (2) to park money which would be used for some expenses in the short term, or (3) to temporarily park money meant for investment in equity funds later (at an opportune time or through systematic transfer).

To begin with, let us understand one thing common in all the above objectives: one is looking at (1) safety of capital and (2) easy and convenient liquidity. If the returns are high, it is an additional benefit, but not the primary purpose for investing in liquid funds.

Let us first look at the third of the three objectives listed above, “to temporarily park money meant for investment in equity funds later (at an opportune time or through systematic transfer).” In this case, the objective is to earn higher returns through equity investment. The liquid fund is used only for the purpose of temporary parking. The question here is not about selecting a liquid fund, but of selecting an equity fund. Once you have done that, you need to invest in the liquid fund of the same fund house to enable smooth transfer whenever required. You need not spend too much time on selection of the liquid fund in such a case.

That leaves the first two objectives of putting money in liquid funds. In both cases, the critical point is to get the money as and when needed, without loss in value. Hence, the critical factors to evaluate the schemes should be (1) safety, (2) convenient liquidity, (3) ease of transaction, (4) timely and hassle-free credit of the money in your account when needed.

Let us start with evaluating safety in a liquid fund. We have highlighted earlier that mutual funds are structurally superior to most products on this count. However, even within that, different liquid funds may have different risk levels.

First of all, liquid funds invest predominantly in debt and money market securities issued by companies and banks. These corporate papers carry a risk that the companies may default on their commitments. In such a case, it is wise to check the credit rating profile of the funds. The second thing you need to look at is the average maturity of the portfolio. The lower the average maturity, the safer the fund. You must check this in case of ultra-short term bond funds, but need not worry about the same if you are investing in a liquid fund. In case of liquid funds, SEBI regulations do not allow the fund to invest in any paper having maturity beyond 90 days.

Points no. 2, 3 and 4 would be almost the same for all the funds, except you may want to be doubly sure that the fund does not have any exit load even for a very short period. Since you are investing for an unknown period, exit load may be avoided. You need to check the exit load only at the time of your investment, as the same is applicable for all prospective investments and not on retrospective basis.

Many fund houses these days offer SMS based or App based transactions. These allow extra convenience as you can seamlessly transfer money from your bank account (if registered for the same purpose) to the fund and vice versa.

One more thing, expenses matter in case of liquid funds. Check the expense ratio before investing.

Liquid funds are the easiest products among the mutual funds to understand and benefit from.

So go ahead, and make use of these funds when you have surplus money to be parked for short periods.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.