What happens to the invested amount in a fund that isn’t accepting new investments? What an intelligent investor should do about it?
As per the new SEBI guidelines, a fund house can have only one fund in each category (Large Cap, Mid Cap, Small Cap, Multi-cap, ELSS, etc.).
It means SEBI has a clear guideline for what stocks a fund can invest in but also makes sure a fund house offers only one fund in each category.
It wasn’t the case earlier.
So fund houses that had more than one fund in any category or at least overlapping fund in a category had to stop the overlapping fund or in some cases merge or rename funds for clarity.
As an example, Reliance Top 200 Fund is now Reliance Large Cap Fund. Aditya Birla SL Tax Plan is closed for new investment and will act like a closed-ended fund. The ELSS fund available from Aditya Birla SL fund house is Aditya Birla SL Tax Relief 96.
There are some questions about such closed, merged or renamed funds in the minds of my blog reader I will answer.
What Happens to the Invested Amount in a Fund Not Accepting New Investments?
The invested amount remains, and the NAV keeps moving as per the investment in the underlying assets by the fund.
Slowly over time with redemptions from investors will help the fund house stop the fund.
So there is a difference between closed for new investments, and fund seizes to exists.
If you have invested in such a fund which is now closed for new investment, no need to panic, as long as an investor wants, he or she can remain invested with the existing units allocated in the fund.
But it is always recommended to redeem from the funds that aren’t accepting new investment as and when one has a plan for redemption.
The reason being as more and more investors redeem, the asset under management for the fund will go down which will increase the expense ratio for the fund. On top of it, a fund may not be managed actively because of very low asset under management. So returns over time may take a beating.
What Happens to SIPs?
Ideally, because the fund is not accepting new investments, SIPs will stop, or they may be switched over to the new fund depending on if the fund is renamed or merged.
In some cases, my friends reported the SIP was stopped and they had to start a new SIP in the other fund.
So if you had a SIP in such fund and if it is continuing, take a statement to see if it is being invested in the fund as expected or not.
Will Investor Pay Exit Load?
As and when one redeems, the exit load if applicable has to be borne by the investor.
In all equity funds, typically there is no exit load if one remains invested for a year or so.
Check your fund’s exit load criteria and redeem only when you aren’t paying the exit load because there is no panic even if the fund is not accepting new investments.
One may also need to pay the entry load when investing in the new fund but if you don’t want to be paying entry load, opt for direct funds instead of regular funds.
Does Investor Need to Pay Long Term Capital Gains Tax?
Yes. If an investor has more profit than his allowable limit of 1L per annum as long term capital gains tax, he may need to pay 10% as LTCG tax on the profit.
One only needs to pay tax when one redeems. To save tax, spread the withdrawal across different financial years. Each year an individual is allowed an LTCG tax-free bracket of 1L. So if the total profit in a fund is more than 1 lakh, spread the redemption across multiple financial years to save the LTCG tax. The best part is, one can withdraw part of the invested amount or units from the fund.
Final Thoughts
Do you have any more question about investment in the mutual funds? Share them in comments below, and I will try to answer them ASAP.
And don’t miss the best equity mutual funds for 2019.
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