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JP Morgan’s 1% cap on redemption sparks off debate on liquidity commitments of MFs

It is the first time since the 2008 financial crisis that a mutual fund has imposed such a restriction.

Written by Sandeep Singh | New Delhi | Published: September 2, 2015 2:55:20 am

The scheme information document of JP Morgan India Treasury fund, which capped redemption in the scheme last week at 1 per cent of units outstanding in a day, did extend an unequivocal commitment of liquidity to the investors in its scheme.

“Units may be purchased or redeemed at net asset value (NAV) subject to applicable loads (if any) on every Business Day on an ongoing basis. The Fund will endeavour to dispatch the Redemption proceeds within 3 Business Days from the acceptance of the Redemption request,” the document promised. A careful reading of the fineprint, though, reveals the clause that the fund seems to have leveraged to impose the cap after the NAVs of two of its schemes fell by around 4 per cent: “Trustee has the right, in its sole discretion, to limit Redemptions (including suspending Redemption) under certain circumstances.”

Last week, JP Morgan AMC in India had imposed the limit on redemption from two of its debt schemes — Short Term Income Fund and India Treasury Fund at 1 per cent of the total number of units outstanding on any day. This was done after the NAVs of the two schemes fell following the liquidity crisis in Amtek Auto, where the two schemes had sizeable exposure of around Rs 200 crore out of their aggregate AUM of around Rs 2,950 crore. While it is the first time since the 2008 financial crisis when a mutual fund has imposed such a restriction, the issue has sparked off a debate over the justification of such a decision.

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While there are those who justify the decision as being in the interest of the investors, with a flurry of redemptions having the potential to lead to further losses on account of the mark-to-market issue, others believe that by placing a cap, the fund house is turning back on its commitment to offer liquidity.

“We are of the view that both the schemes were open ended in nature and that means that an investor would be paid the money with or without the exit clause as and when he chooses to exit and so the investor needs liquidity. On the other hand an investor who does not need liquidity would go into fixed maturity plans. So, such restriction goes against the initial assurance,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

Another investment advisor, Surya Bhatia, however, said that the decision is in the interest of investors because if all the investors start redeeming their holding then because of the mark-to-market nature of investments, the value of the investment and therefore the NAV goes down and leads to more losses for investors.

There are some who question if the firm had exhausted other options such as existing cash or credit line with banks to meet the redemption before deciding to restrict the redemptions.

Messages sent to senior officials of the fund house asking the same did not elicit any response. Questions are also being raised over the ratings offered by research organisations or data aggregating agencies and industry insiders say such ratings have also come under scanner.

While valueresearchonline.com had provided a 4-star rating to JP Morgan India Treasury Fund and a 3-star rating to the short-term income, now there are question marks over the rationale of such ratings. “The regulator is looking into such ratings being offered. There is a possibility that the capital markets regulator may come out with guidelines on such ratings as they are only based on the past performance,” said a source close to the development.

The rating methodology of Value Research notes that: “It (the rating) only gives a quick summary of how a fund has performed historically relative to its peers… For debt funds, the Fund Ratings are based on 18-month weekly risk-adjusted performance, relative to the other funds in category.”

While there is concern among investors over the liquidity of their investment in mutual funds, industry insiders say that the issue is limited to the two schemes of a fund house and is in no way affecting other schemes or fund houses.

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