Ravinder Khanna (name changed) wanted regular monthly income for his married daughter Ruchi (name changed) through some investments, and consulted his tax lawyer Jasveer Singh (name changed) to suggest a suitable investment. Although Ravinder had never invested in mutual funds (MFs), but Jasveer asked him to invest in the dividend payout option of a popular balanced equity fund of a leading Asset Management Company (AMC) that was consistently giving monthly dividend for years.
Encouraged by her father, Ruchi started investing in the fund suggested by Jasveer in early 2017 and delighted by regular and significant monthly dividend payouts, Ravinder persuaded her to make further investments.
Things were going smooth till March 2018, but deduction in monthly dividend amount by over 11 per cent from April 2018 due to implementation of Dividend Distribution Tax (DDT) on jolted him.
Although being unhappy about the loss of income of his daughter, Ravinder still encouraged Ruchi to invest more in the scheme till parallel mutual fund schemes run by respective AMCs under the same category were merged following market regulator Securities and Exchange Board of India’s (SEBI) order to reduce the number of schemes to make choosing funds easier for investors.
Ruchi lost about 4 per cent units when the scheme in which she had invested was merged with another scheme of balanced equity fund category of the AMC on June 1, 2018 as the NAV of the new scheme was 4.13 per cent more than the NAV of the scheme she was holding.
Due to the loss of units, the value of her MF holding subsequently went below the value of total investments made and currently stands eroded by about 12.69 per cent. As the NAV under dividend payout option moves marginally due to periodic dividend payouts, there is little chance that the erosion in value will get filled up over time.
Ruchi wanted to invest more, but having been disheartened by the turn of events, Ravinder dissuaded her. Even Jasveer is not in a position to counsel as value of his own investment in the same scheme stands eroded by around 17.21 per cent due to the merger.
However, an interesting point to note is that the NAV of the scheme in which they had invested was more than the scheme in which it was merged till 1 year back (about 2.1 per cent higher on June 2, 2016 and about 2.45 per cent higher on June 1, 2017), but started lagging from around August 2017 – about 5 months before the scheduled merger.
So, the question is, even if people started shifting their investments out of the scheme that was going to be merged in another scheme and the fund in which it was scheduled to be merged witnessed increased investments, can redemption and purchase pressure move the NAV of schemes?
According to experts, Net Asset Value (NAV) is per unit value of a mutual fund's assets minus the liabilities.
"NAV is calculated by dividing the total value of assets or shares held by a scheme divided by the total number of units issued under that scheme. So, if the value of shares increases, the value of NAV goes up and if the value of shares comes down, the NAV goes down," said Manish Saluja, CFP, Founder Prime Wealth Advisors.
"Redemption or purchase has no impact on NAV. Rather, the value of assets impacts NAV," he concluded.
Rachit Chawla, Founder and CEO, Finway, however, said that NAV may decrease due to mass redemption as the value of underlying stocks would decrease due to redemption pressure and vice versa.
But the point is that both the schemes were managed by the same AMC and were following the same index. So, there might be sale and purchase of similar set of stocks due to shifting of money form one scheme to the other.
Taking a balanced stand, Raghvendra Nath, Managing Director of Ladderup Wealth Management, said, "A sudden sell-off may negatively impact the NAV of a mutual fund. It is not always necessary that a mutual fund price will drop due to the huge selling of shares by the fund manager."
Yashpal Sharma, Vice President, Taurus Asset Management Co Ltd was of the opinion that although normal redemption pressure doesn’t impact NAV, mass redemption may.
"For regular redemption by investors, a mutual fund scheme has some free liquidity that allows them to meet the demand without adverse effect on the NAV. However, in cases of mass redemption, where the fund manager may not have enough free cash available, the fund will have to sell their investments (assets) to meet the redemption pressure. This sudden sale in a short period of time may lead to decrease in the price of the underlying asset with a resultant decrease in NAV of the scheme," said Sharma.
However, he doesn’t think mass purchase pressure would enhance the NAV of a scheme. "Owing to sudden inflow of funds there may not be enough suitable opportunities to invest and hence the investments may be parked in low-yielding assets like bonds, FDs etc, thereby decreasing the overall scheme return in the short to medium term," he said.
Ankit Agarwal, MD Alankit Ltd was of the opinion that the NAV may vary, as during massive redemption request, there is no choice for fund houses but to sell scrips from their portfolio regardless of its price in the market.
So, it can’t be said conclusively if the NAV of two funds would move directly when one fund sees mass redemption pressure and the other one sees mass purchase pressure, especially if both the funds are in the same category having similar set of underlying assets.
Despite difference in the opinion of experts, the fact is that investors have witnessed erosion in the value of their holding when the fund they had invested was merged with the other fund in the same category.
Now the bigger question is, whose task is it to restore the confidence investors who have suffered without any fault of theirs? Did the regulator realise that a move to make things easier for investors may sometimes leave them battered? Did the concerned AMCs take steps to ensure that the fund values of investors remain unaffected following the merger process?
Apart from market volatility, if investors see irreparable loss in their fund value due to regulatory measures, who will they trust?