Mar 09, 2017 02:53 PM IST | Source: Moneycontrol.com

Mutual funds stop new investments for the benefit of investors

Mutual fund house stops accepting fresh investments in a particular scheme due to lack of investment opportunities in the market.

Mutual funds stop new investments for the benefit of investors
Arnav Pandya

There are times when mutual funds restrict the investments into a particular scheme. This usually happens in case of small and mid cap funds where the fund manager is not able to find adequate opportunities for investments. If there is a bull run in these stocks then it becomes very difficult for the fund manager to keep deploying the funds that continue to pour into the scheme. In this case the fund house is forced to put a stop to the investments by restricting the new purchases that investors can make into these funds. This can mean a time of worry for existing investors but here is a manner in which they can look at the entire situation.

Protection

Existing investors need not worry about any such restrictions that they witness in terms of new investments into the scheme. This is because the step is actually for their protection. If the fund house continues to allow the money to pour in then they would be forced to buy holdings at the high valuations that are present. Such a step is always taken only when the fund house feels that there is a high valuation in the market which might not be justified and this could make the investment process difficult to complete. This kind of stoppage can prevent a sharp fall in the value of the fund in case there is a big crash in the small and mid cap stock. While an overall slide will lead to a fall in the net asset value but ensuring that there is not too much risk present by deploying even greater amounts at a high valuation can ensure that there is some protection that is being provided to the existing investors and hence this should be a positive factor as far as the existing investors are concerned. They should feel happy that the fund is acting to protect their interests.

Indication

One of the other benefits of such a move is that the fund stopping further or new investments actually means that they are giving a signal to the existing investors about the state of the market. This is especially true for the smaller stocks where valuations can get quite frothy and this could lead to a sharp correction at any point of time. When the fund house is clearly saying that they feel that the valuations are high it should act as an indication for the investors that they need to pause and watch their step. This can be a way in which investors actually end up knowing about the higher risks that are present in the market. Once this is known the investor can then take steps to ensure that they are tackling this position in an effective manner.

Liquidity

The investor in the fund also has to make a clear distinction between the restriction of new investments and the liquidity in the fund. There is a stop on the money coming into the fund however this need not mean that there is a stop into the money going out of the fund. Those investors who think that the run up in values is quite high and the risk has become too much for their liking can actually do the opposite thing which is to sell off their holdings. However, just because the fund manager is not comfortable with a certain kind of valuation does not automatically mean that there is some problem that is present. It could turn out to be a wrong assumption and hence the investor needs to take this into consideration also when they are taking any specific step related to their investment.
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