Wef June 1, 2012 - Amfi has asked mutual fund houses to process switches the very same way they process the redemption of mutual fund units that is now on Uniform process would be followed for processing of redemption/switch-out for all the Schemes of the Mutual Fund.
Pursuant to Association of Mutual Funds in India (AMFI) Best Practice Guidelines Circular No.28/2012-13 dated May 15, 2012, unit holders are requested to note that application for redemption/switch-out for units, for which funds are not realized via purchase or switch-in in the scheme of the Mutual Fund, shall be liable to be rejected.
In other words,redemption or switch out of units will be processed only if the funds for such units are realized in the scheme, by way of payment instructions/transfer or switch-in funding process.
For Example, A invests in a liquid fund on Monday and requests to switch out to an equity fund on Tuesday. This way, A earns returns for one day when the AMC has not yet received the funds. Fund houses usually receive money on the third or fourth day. These returns in effect are being paid out by existing investors. If you invest in an equity fund on Monday, we give the same day's NAV. The money is realised only on Thursday. Some investors give a switch-out request on Tuesday from an equity to a liquid fund. The source fund (equity fund) makes the payment to the liquid fund (switch-out fund) without realising funds. Then investors exit out of the liquid fund on the third day (Wednesday).
This latest AMFI circular says that all switch-outs should be done only after realisation of funds. Now, you can’t redeem unless the money is realised by the AMC.
Further, all switch funding shall be in line with redemption funding timelines adopted by the concerned scheme i.e. if a scheme follows T+3 payout for redemption, the switch out funding will also be made on T+3 and not earlier or later than T+3, where T is the day of transaction.
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