What to Do If a Mutual Fund Company Shuts Down Today?

A new client who never invested in mutual funds asked – what if a mutual fund company shuts down? This blog post explains the answer in simple terms.

Mutual Funds are one of the most trusted and regulated investment avenues in India. Lakhs of retail investors invest in mutual funds assuming that their money is professionally managed, diversified, and safe. But what happens if a mutual fund company (AMC – Asset Management Company) suddenly announces that it is closing down?

In this blog post, I will explain in simple and layman-friendly terms what happens in such scenarios, how SEBI protects your money, and what steps you should take as an investor. This post also includes insights from the latest SEBI regulations (till 2025) that are relevant in such a situation.

What to Do If a Mutual Fund Company Shuts Down Today?

AMC Closes – Does That Mean You Lose Your Money?

No. If a mutual fund company (AMC) closes or exits the business, your money is not lost. Your investments are protected by a robust regulatory framework enforced by SEBI (Securities and Exchange Board of India).

Here’s why:

• Mutual funds are structured as Trusts, not as part of the AMC’s own business.
• The Trustees of the mutual fund are independent and are duty-bound to protect investor interests.
• The Custodian (appointed SEBI-registered entity) holds the fund’s assets (stocks, bonds, etc.).
• The AMC is only a fund manager. Your invested money doesn’t sit with the AMC.

Why Might a Mutual Fund Company Shut Down?

An AMC might exit or shut down operations due to the following reasons:

1. Merger or Acquisition – AMC is acquired by another fund house.
2. Business Exit – Foreign or small AMCs may exit India due to low profitability.
3. Regulatory Action – SEBI may take action if an AMC violates rules.
4. Winding-up of Schemes – Specific schemes may be closed due to liquidity or risk issues.

Examples:

• Fidelity India AMC was acquired by L&T Mutual Fund in 2012.
• In 2020, Franklin Templeton closed 6 of its debt schemes due to market stress. The AMC did not shut down, but investors faced delays in getting money.

What SEBI Regulations Say – Protection Framework for Investors

SEBI has laid out a detailed framework under its SEBI (Mutual Funds) Regulations, 1996 and has been updating it frequently to enhance investor protection. Some key regulatory safeguards include:

1. Separate Trust Structure

Every mutual fund is established as a trust under the Indian Trusts Act, 1882. The AMC only manages the schemes on behalf of the trust. Investor money is held independently.

2. Role of Trustees

Per SEBI Regulation 18, trustees are legally responsible for:

• Ensuring compliance with SEBI regulations.
• Safeguarding the interests of investors.
• Appointing a new AMC if the existing one fails or exits.

3. Custodian of Assets

As per Regulation 26, the assets of the mutual fund schemes are held by an independent custodian, not the AMC. The custodian is SEBI-registered and ensures safety of all securities.

4. AMC Exit or Change of Control – SEBI Circular (July 2023)

According to SEBI’s circular dated 27th July 2023 on “Change in control of Asset Management Company”, the following steps are mandatory:

• AMC must take prior approval from SEBI before a change of control.
• Scheme unitholders must be informed 30 days in advance.
• Investors are given an option to exit without exit load.

5. Winding up of Mutual Fund Schemes – Regulation 39

Under SEBI rules:

• An AMC can only wind up a scheme after approval from the trustees and unitholders.
• In case of sudden closure (like Franklin Templeton in 2020), unitholder consent via voting is mandatory (SEBI amendment in 2021).
• The money is returned to investors after selling the underlying assets.

6. Transfer of Schemes to Another AMC – SEBI Approval Required

In case an AMC exits the business:

• Its schemes can be transferred to another SEBI-registered AMC only after SEBI’s due diligence.
• The new AMC must send detailed communication to all unitholders.
• SEBI oversees the entire transfer process.

What Happens When an AMC Shuts Down?

Let’s look at various possibilities and their outcomes:

Case 1: AMC Merges with Another AMC

• Your scheme is transferred to the new AMC.
• NAV, units, and investments remain unchanged.
• You receive official communication from both AMCs.
• No action is required from your side unless you wish to redeem.

Case 2: AMC Shuts Down & Schemes are Transferred

• Trustees appoint a new AMC (with SEBI approval).
• Schemes continue as-is under new management.
• Your investments are safe.

Case 3: Schemes are Wound Up

• Securities in the scheme are liquidated.
• Proceeds are returned to investors (usually in tranches).
• You receive money based on NAV on the date of winding-up.
• You may have to pay capital gains tax on the returns.

What Should You Do as an Investor?

1. Don’t Panic

Your investment is not at risk due to the AMC shutting down. The trust structure and SEBI’s regulations ensure full protection.

2. Wait for Official Communication

You will receive:

• An email or physical letter from the AMC or its RTA (like CAMS or KFintech).
• Scheme-wise impact note and your options.

3. Track Your Holdings

• Use MF Central, CAMS, or KFintech portals.
• Download your Consolidated Account Statement (CAS) for scheme status.

4. Avoid Immediate Redemption

Unless there’s a strong reason, avoid panic withdrawals:

• Exit load may apply.
• You may incur short-term capital gains tax.
• Markets may be volatile, affecting NAV.

5. Evaluate New AMC (If Transferred)

Check the reputation, track record, and investment style of the new AMC:

• Does it match your financial goals?
• Are you comfortable continuing?

If not, you can redeem it and reinvest it in another fund.

6. Understand Tax Implications

• If units are transferred (due to a merger): no capital gains tax.
• If money is returned due to the scheme closure: capital gains tax is applicable.

Practical Example – Franklin Templeton Case (2020) (Franklin Templeton India Closed 6 Debt Funds – What investors can do?)

• Franklin shut down 6 debt funds, citing liquidity stress.
• Initially, redemptions were frozen.
• Investors received money in multiple tranches over the next 2–3 years.
• The process was overseen by SEBI, trustees, and even the Supreme Court.

Conclusion – Closure of AMC or scheme and merger are part and parcel of the mutual fund industry. To avoid such complications, the only solution is to diversify your investment across AMCs. Let us say you started with one large cap fund of the ABC mutual fund company. Once you start to feel that the size of your investment in this particular fund is too big (how much big is personal comfort), then you can add one more large-cap fund of a different AMC. But make sure that adding more than two funds in each category is not required (irrespective of your investable amount).