You all must have faced a plethora of questions from your clients or prospective clients about various investment products, their suitability, risk, returns, etc., and a very common question that comes up often, especially in the case of a new client is “What if the AMC goes bankrupt or if it decides to close down? People doubt the continuity of the AMC, and they wonder what will happen to their money if the fund closes down one day. This is indeed a difficult question and many times we do not have a satisfactory reply for the client. We may resort to generalized statements like “I am here, you don't have to worry” or “Nothing will happen to the AMC, it's in business since more than a decade”. The client has a very valid question and he is looking forward to getting a logic behind the sustainability of the fund from his advisor and not a vague assurance.
The advisor needs to tell them the rationale behind the safety of their investment. So we have penned down the points that will help you in supporting your contention and to provide comfort to your investors, which are as follows:
- The key logic is, the Mutual Fund AMC or the broker don't own your investment, they are the facilitators between you and the companies where your fund has invested in. Your investment lies with the companies and not with the AMC. For Eg. You have invested Rs 1 Lac in a Diversified Equity Fund of HDFC Mutual Fund, and the fund has a portfolio of let's say 50 different stocks. So, HDFC does not have your money, it is only managing the portfolio. So, in the worst case scenario if one day HDFC decides to close down, the money is yours and is lying with those 50 different companies in different proportions as decided by the AMC. In case a part or all of the investor's money is in the form of assets like Gold, or real estate or cash, then all these assets lie with a Custodian, an independent entity, and not with the AMC.
- Secondly, SEBI has put strict checks on the structure and activities of a mutual fund with a view to protect investors' interests. The structure of a Mutual Fund is such that there is minimal scope of manipulations. The day to day operations of a mutual fund are carried out by the AMC. A mutual fund is constituted as a trust, and this trust acts through independent trustees, who have no relation with the sponsor. The primary role of these trustees is protecting the investors' interests at all times. Moreover, there is high level of transparency mandated by SEBI in Mutual fund's routine operations. The NAV is published on a daily basis, the portfolio, commissions and charges, and other relevant details about the fund have to be aptly disclosed. Because of such strict checks, rules and regulations, the investors are protected at all times.
- Thirdly, the Mutual Fund may decide to shut down operations, sells its business or merge with another mutual fund. In India, such mergers have taken place in the past, without bringing in any trouble for the investors. So, if your mutual fund is about to get shut, you will be allocated units of the merged mutual fund or the new mutual fund for an amount equal to the investment you held in your last mutual fund. If in case you aren't happy with the decision, don't worry, you will be given enough time to redeem your units at the latest NAV without having to pay any exit load.
So, whenever you visit a new client, be prepared for this question, the above points will help you in gaining his satisfaction. It's best that you familiarize yourself with the Mutual Fund Structure, rules and regulations protecting the safety of the investor and past examples of Mutual Fund mergers, to support your claim better.
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