JP Morgan AMC limits redemption from two of its schemes!

Many mutual fund investors (and advisors too perhaps) were shocked to learn that JP Morgan AMC decided to limits redemptions to 1% of outstanding units at the end of each business day. Questions and statements like, “how can they do this?!”, “what is SEBI doing?”, “it is my money and I have the right to take it out when I want”, did the rounds.  A look at the fine print, the implications of mass redemptions and if JP Morgan AMC was justified in its actions.

Why they did it?

Two of their debt fund schemes,  JPMorgan India Treasury Fund and JPMorgan India Short Term Income Fund, collectively held about 400 Crores of Amtek Auto debentures which were downgraded by rating agencies. This led to a sudden fall in NAV. Read more here: Understanding Credit Rating Risk in Debt Mutual Funds

The JPMorgan India Short Term Income Fund was part of Mint 50 and FundsIndias ‘select’ list. While Mint said ‘hold on’, FundsIndia, said ‘exit’. Twitter onlookers were quick to criticise FundsIndia (which is immature) and many financial advisors joined the chorus and sounded as if they would never touch JP Morgan funds!!

So naturally fear spread among investors who wanted to exit the funds in a hurry. Therefore, JP Morgan was forced to use the ‘Right to Limit Redemptions’ rule laid down by SEBI.

Right to Limit Redemptions: The Trustee, in the general interest of the unit holders of the Scheme offered under this Offer Document and keeping in view of the unforeseen circumstances/unusual market conditions, may limit the total number of Units which can be redeemed on any Business Day depending on the total “Saleable Underlying Stock” available with the fund.

Whether it is an “unforeseen circumstances/unusual market conditions” is quite debatable.  That JP Morgan chose Amtek bonds is not the problem. That they could not get rid of them when the firm got into trouble is the problem. Who would be willing to buy bonds from a firm with no credibility.

So all investors in those two JPM funds decide to exit together, who will be affected? The AMC or the investors?

In October 2008, when there such a situation, the AMC took the losses in their books. However, SEBI decreed that bonds must be marketed to market. So if all investors exit a mutual funds, the AMC will simply sell holdings at market prices and the investors will bear the loss (the NAV will plummet).

So JP Morgan is right in limiting redemptions to protect investors. JP Morgan made a bad call in selecting Amtek bonds. Something that we can state with the benefit of hindsight. Such calls are part of parcel of security selection and financial advisory. Investor not mature enough to understand this, ought not to use mutual funds.

Let us not forget  When we invest, it is “our money”. We give it a custodian who are duty bound to the group of investors. Not just us. When we redeeem, we do not get money. We get units held times current NAV. It is the AMCs prerogative to protect that NAV.

When an AMC limits inflow, it does to protect unitholder interest. Then we hail the AMC as professional and investor friendly. The same applies when the AMC limits outflows due to unusual circumstances.

What happened to JP Morgan can happen to any AMC!

Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Do check out my books

You Can Be Rich Too with Goal-Based InvestingYou can be rich too with goal based investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create customg solutions for your lifestye!Get it now.  It is also available in Kindle format.

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want My second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a youngearner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Create a "from start to finish" financial plan with this free robo advisory software template

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

4 thoughts on “JP Morgan AMC limits redemption from two of its schemes!

  1. thanks for the post, otherwise it would have gone unnoticed by common investors like me , and missed the important risk of debt funds in hindsight.

  2. thanks for the post, otherwise it would have gone unnoticed by common investors like me , and missed the important risk of debt funds in hindsight.

Comments are closed.