Here's an interesting perspective from a member of the IFA
community for boosting the growth of the MF industry.
Almost every investor
knows that equity is a long-term investment. But only the wise ones actually
follow this dictum… and make money. The rest, not able to cope with the
volatility of the market, lose out.
When there is some
restriction on exit, investors stick to their investment. Consider investments
in instruments like PPF or NSC. But in the case of equity mutual funds,
investors are tempted to flee the market whenever there is a downturn.
There has been an
attempt to ensure that investors stick to their investments by the launch of
close ended funds. However, these schemes have not been that popular mainly due
to their thematic nature and heavy exit loads.
The idea is to
provide the investor an option to put a lock on a folio for a time period. The
investor will not have the right to redeem the money from the folio thus
created before the elapse of this stipulated period. However, the investor will
still have the right to change the asset allocation or the scheme.
At the time of
investment, investors always want to stay invested, despite market volatility.
But as we have seen, as soon as the market corrects, there is a stampede for
the exit. This herd mentality will continue if there is no lock-in period.
A lock-in period will
benefit all concerned, including the investor and the AMC. This lock-in should
be finalized at the time the investment decision is made.
This move will drive
a number of advantages:
suggestion will help in amending the investor psyche and help to increase
investor will stay invested for a longer period of time, but asset
allocation can be amended.
- Market speculation (which can be disastrous) among
retail investors will come down.
- Investors will be more disciplined and will not lose
sight of their financial goals.
- The AMC will have the money in its kitty for a longer
timeframe, and this will improve its performance.
- If SEBI considers it worthwhile, portfolios with a
lock-in feature should be treated as instruments for tax savings.
In the following
cases, premature redemptions should be allowed from the lock-in schemes:
Death of the investor.
Financial crisis and urgent liquidity requirement.
Regulatory amendments like the scrapping of exit
Sale of the AMC.
Changes in taxation on equity or debt schemes by the
The lock-in feature
can be introduced through a lock-in form that clearly specifies the period when
the investment would stay locked. To curb mis-selling, the investor should be
granted a 30-day period in which he can redeem his folio.
Going ahead, this
move will benefit the entire industry.
(The author is the
Director of Santushti Securities Private Ltd, Lucknow)