Last month, UTI Asset Management Co. Ltd extended the maturity of two of its fixed maturity plans (FMPs). The tenure of UTI–Fixed Income Fund-Series XVIII-IX was extended from 733 days to 1,114 days, and that for UTI–Fixed Income Fund-Series XVII-XVIII was increased from 796 days to 1,170 days. The first scheme’s tenure went up by 381 days and the second’s by 374 days. This change is called a rollover. There is another option of reinvestment which the investor has in the form of interval funds.
What is a rollover?
Closed-end mutual fund (MF) schemes come with a particular tenure; these can have a tenure of, say, 3 years, 5 years and so on. When they mature, the underlying instruments mature as well, the scheme gets wound up and the money is paid back to investors. But when the same scheme extends its tenure, it is said to have rolled over.
Many FMPs launched before the 2014 budget (presented in July 2014) were caught in a bind when the threshold for debt fund investors to claim long-term capital gains (LTCG) tax benefits was increased to three years, up from a year that was prevalent up until then. The finance minister later clarified and exempted withdrawals made in debt funds between 1 April 2014 and 10 July 2014. Withdrawals made after 10 July had to adhere to the new rules.
This made many FMPs roll over for a period that enabled them to complete three years. By doing this, investors could complete three years, and thus claim LTCG tax benefits.
In a rollover, no new investors can come in, and by default, investors get to exit. However, investors have to pay tax on withdrawal depending on their investment tenure. And if they decide to opt for the rollover or continue, they have to say so explicitly.
What is an interval fund?
An interval fund lies somewhere in between an open-ended and a closed-end scheme. It has no specific tenure, i.e., its existence is in perpetuity, but it’s shut for inflows and outflows for most part of its life. However, it periodically offers a window for entry and exit. This can last for a day or two, and it usually comes once every quarter or year. Interval funds with a quarterly window have become a rarity, but even those with a year’s window have reduced in number. As per data by Value Research, there are about 170 interval funds currently.
