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When Mutual Funds Say ‘No’ To New Investments, Here’s What You Can Do   Dec 06, 2017

Stop InvestmentsAt a time when mutual funds spend crores of rupees to garner new assets, it is a rarity to hear some mutual fund schemes restricting inflows. Given the high market valuation in the mid-cap space and liquidity concerns, many mid-cap oriented funds are restricting fresh inflows.

Portfolio construction in this environment becomes increasingly difficult. So, to prevent undue exposure to high-risk mid-cap stocks, and/or to avoid a sizable allocation to large-caps, these funds have no other option but to restrict inflows.

Investors tend to chase high performance mutual funds. Hence, such high-risk and high-return mid-cap schemes have reported a surge in investments over the past few years. The burgeoning Assets under Management (AUMs) are a growing concern for investors as well as the fund houses.

Unfortunately, investors tend to ignore the high-risk and continue to invest unhindered. On the other hand, fund managers cannot ignore the portfolio risk. Therefore, they are inclined to say ‘No’ to the increasing investments.

Why does the high AUM work against an outperforming mutual fund scheme?

  • Small and microcap funds invest in small companies, but ones that have tremendous growth potential
  • Smaller the size of the company, more illiquid the stock would be. This means, buying and selling large quantity of shares at a single price becomes challenging
  • To address liquidity concerns and curb the downside risk to the portfolio, schemes with higher AUM start diversifying into larger mid-caps, and sometimes large-caps
  • As the average market cap of the portfolio goes up, it tends to become more stable, and so generates less lucrative returns in the subsequent times

Here is a brief of the mutual schemes that have restricted investments in their schemes:

IDFC Premier Equity Fund: This was one of the first open-ended schemes to restrict lumpsum investments. The fund manager at the time, Mr Kenneth Andrade, would open the scheme for lumpsum subscriptions only when a window of opportunity came up to pick stocks at reasonable valuations. The lumpsum option was last available in May 2014. However, you can invest via a Systematic Investment Plan (SIP) in IDFC Premier Equity Fund.

SBI Small & Midcap Fund: SBI Mutual Fund restricted fresh investment through lumpsum and new SIPs/STPs and Dividend Transfer Plans in SBI Small & Midcap Fund beginning October 30, 2015. Existing SIPs registered prior to the effective date are allowed to continue.

Mirae Asset Emerging BlueChip Fund: With effect from October 25, 2016, Mirae Asset Mutual Fund has stopped fresh lumpsum subscription and switch-in to all the Plans & Options of Mirae Asset Emerging BlueChip Fund. However, the fund house did not stop fresh SIPs, but restricted inflow through the systematic route as well. It kept a limit of Rs 25,000 for each installment per PAN level for each investor. From December 10, 2017 onwards, the fund house will offer SIP on only one day — the 10th of every month.

DSP BlackRock MicroCap Fund: DSP BlackRock Mutual Fund suspended all purchase transactions for DSP BlackRock MicroCap Fund with effect from February 20, 2017. Only SIPs registered prior to this date can continue.

IDFC Focused Equity Fund: This is one of the recent schemes to jump on the bandwagon. IDFC Mutual Fund imposed restrictions on fresh investments in IDFC Focused Equity Fund with effect from December 4, 2017. Lumpsum purchases have been restricted to Rs 2 lakh per application. Investments through the systematic route (SIP/STP) is restricted to Rs 2 lakh per instalment.       

L&T Emerging Businesses Fund: Similar to IDFC Focused Equity Fund, L&T Mutual Fund has restricted large inflows into L&T Emerging Businesses Fund, in the ‘interest of existing unit holders’. Lumpsum subscriptions and switch-ins have been restricted to Rs 2 lakh per investor per day. The single installments for SIPs/STPs have also been limited to Rs 2 lakh. SIPs/STPs registered prior to the effective date will remain unaffected.

While these restrictions may be new for some investors, in the past, Franklin India Prima Fund, Reliance Growth, and HSBC Midcap too had restricted inflows for a temporary period.

How should you deal with investment restrictions?

If you are a regular investor in such schemes, restrictions on investments can easily throw your financial plans off track. Especially in the schemes where lumpsum and SIPs have been completely suspended.

While your existing SIPs may continue unrestricted, you may by unable to plan for new financial goals with the imposed restrictions. In such cases, it is best to consult with your financial planner. You may need to pick alternative schemes that match your risk profile and investment horizon.

In most other cases, the restrictions are on larger lumpsum investments. SIPs are a prudent way to invest in high volatile schemes, hence, your financial plans should remain unaffected. At the same time, when picking equity mutual fund schemes, do not ignore your risk tolerance and adopt an adequate asset allocation strategy.

Read about PersonalFN’s Comprehensive Financial Planning Service here

In the current scenario, those who invest in small and mid-cap funds with the aim of generating supernormal returns may end up disappointed. Hence, it is best to take a hint from the mutual fund schemes that have imposed a restriction and adopt a cautious approach.

To negotiate volatile and overvalued market environments, it is best to invest in mutual funds with an effective strategy in place. One such strategy to invest in mutual funds is to have a Core and Satellite mutual fund portfolio in place to add stability and well as capitalise on high growth investment options.

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Your ‘core portfolio’ will consist of large-cap, multi-cap, and value style funds, while the ‘satellite portfolio’ will include funds from the mid-and-small cap category and opportunities style funds. The core portfolio offers stability by investing in funds that promise sturdy returns and have a strong ability to manage downside risk. The satellite portfolio provides the opportunity to support the core by taking active fund calls determined by PersonalFN's extensive research on mutual funds.

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Apr 07, 2018

why there is a restriction on lump sump investment in mutual funds