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ABN caps select redemptions

Calcutta, Oct. 15: Mutual funds have started imposing limits on daily redemptions to keep panicky institutional investors at bay.

ABN Amro Mutual Fund is the first asset management company (AMC) in the country to place such a restriction on its fixed maturity plans (FMPs) having a tenure of one year or above. Many more fund houses are likely to follow suit.

From Thursday, ABN Amro investors in close-ended debt schemes will not be able to redeem more than Rs 1 lakh daily.

“This is a short-term measure the trustees of ABN Amro Asset Management (India) Pvt Ltd has decided today. The restriction will be limited to FMPs with maturity of one year or more. Investors in cash/liquid or equity schemes can redeem their units without any restriction,” said Nikhil Johri, managing director, ABN Amro Asset Management (India) Pvt Ltd.

“By definition, FMPs are close-ended schemes which means that an investor in such a scheme cannot exit before maturity. In normal circumstances, not even one per cent of net assets under such a scheme gets redeemed,” Johri said.

There is now a mad rush by cash-strapped and panicky institutional investors — including companies, banks and financial institutions — for redeeming their units either to replenish their cash requirement or to keep the money in bank fixed deposits where the capital will not erode. Investors can exit close-ended schemes such as FMPs before maturity if they pay an exit fee.

ABN Amro has also put a limit of five per cent of the net asset of each scheme for redemption on a daily basis. “This means that if we get redemption requests amounting to more than 5 per cent of the net assets under a scheme, the excess over 5 per cent will be carried forward for redemption the next day,” Johri said.

He said the restrictions would be lifted when the situation improved.

More asset management companies are likely to take resort to such restrictions because borrowing under the RBI’s latest norms cannot be fully effective.

Dhirendra Kumar, CEO of Value Research, said the RBI’s Rs 20,000-crore loan facility might not be adequate for the redemption problem. “In fact, there is no easy solution for this. The problem at hand is far more grave,” he said.

Mutual funds can borrow money from banks up to 20 per cent of their asset under management, but that’s for the short term — 15 to 21 days.

“Long-term debt papers are more illiquid than short-term debt papers. Which means that if an asset management company has to sell these debt papers to meet redemption pressure, it will have to sell them at heavy discounts. This will lower the return of investors who don’t want to exit. Hence, limiting redemption is the only effective way to protect the interest of existing investors,” Johri said.

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