What Happens if a Mutual Fund Company Closes or is Sold? (2024)

FAQs

What Happens if a Mutual Fund Company Closes or is Sold? ›

Liquidation involves the sale of all of a fund's assets and the distribution of the proceeds to the fund shareholders. At best, it means shareholders are forced to sell at a time, not of their choosing. At worst, it means shareholders suffer a loss and pay capital gains taxes too.

Liquidation or Transfer of Assets: If a mutual fund company is unable to continue operating, SEBI may initiate the process of liquidating the assets of the affected mutual funds. The proceeds from the liquidation are then distributed to the investors.

When a mutual fund is sold, it is called a redemption. Mutual funds typically keep cash reserves to cover investor redemptions so they aren't forced to liquidate any portfolio holdings at inopportune times.

You generally can withdraw money from a mutual fund at any time without penalty. 7 However, if the mutual fund is held in a tax-advantaged account like an IRA, you may face early withdrawal penalties, depending on the type of account and your age at the time.

Closing a fund to new investors results in a reduction in the growth of the total amount of money that the fund managers must invest, which may enable them to maintain their preferred investment style by avoiding capacity constraints [1, 2].

The chances of your mutual fund investment value going to zero are practically almost impossible as it would mean that all the assets in the fund's portfolio will have to lose their entire value. However, the returns from a fund can go to zero or even become negative.

Inherent in all closed-end bond funds are market risk and credit risk. Market risk involves the potential impact of increasing interest rates, which could lead to a decrease in the value of the fund's bond holdings.

The credit happens directly to your bank account from the AMC (Mutual Fund Company.) If you started a sell transaction before the cut-off time on a working day, then you will receive funds in your account in 1-2 working days. So if you place an order to sell mutual funds on Friday at 4:00 PM.

Liquidation involves the sale of all of a fund's assets and the distribution of the proceeds to the fund shareholders. At best, it means shareholders are forced to sell at a time, not of their choosing. At worst, it means shareholders suffer a loss and pay capital gains taxes too.

However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.

How much tax do you pay when you sell a mutual fund? ›

Closed-end funds can own a greater number of illiquid securities than mutual funds. This can influence the fund's NAV and its premium or discount. But typically, the bigger risk is closed-end funds' potential use of leverage (i.e., borrowed money).

You may cancel your mutual fund SIPs offline by notifying your bank and the respective AMCs. You can also have your mutual fund agent do it for you. Request a SIP cancellation form from your asset management firm or through online Mutual Fund Registrar and Transfer websites such as CAMS and KFin Technologies Limited.

If a mutual fund scheme winds up or closes, the assets of the scheme are liquidated. Following this, the proceeds are distributed to the unit holders in proportion to their holdings, based on the prevailing Net Asset Value (NAV) after deducting the relevant expenses.

Diversified management investment companies have assets that fall within the 75-5-10 rule. A 75-5-10 diversified management investment company will have 75% of its assets in other issuers and cash, no more than 5% of assets in any one company, and no more than 10% ownership of any company's outstanding voting stock.

Market Volatility and Risk Management

Assess how the fund fares compared to its category peers and relevant benchmark indices to determine if it consistently lags. If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment.

Typically, when a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. If the SIPC is unable to arrange the accounts' transfer, the failed firm is liquidated.

Closed-End Fund Basics

Unlike mutual funds, which continuously sell newly issued shares and redeem outstanding shares, most closed-end funds offer a fixed number of shares in an initial public offering (IPO) that are then traded on an exchange.