Your money is SAFE

Many of the invetors are worried about the future of their investments in foreign funds. For the benefit of you and other worried investors I have copied the latest article of Dhirendra Kumar below.
In the last two days, I've received a large number of queries from worried investors about the safety of the money they've invested in funds run by foreign-owned asset management companies. This includes both wholly foreign owned ones like AIG, Fidelity and Franklin as well as those that are joint-ventures with foreign companies like DSP Merrill Lynch, Birla Sun Life, ICICI Prudential and Sundaram BNP-Paribas.

On the face of it such worries are understandable. Over the last few months, many big names have been revealed to be quite hollow. As I'm writing these words, news has come in that the AIG group, the world's largest insurer has, for all practical purposes, been nationalised by the US government, The company's top management is in the process of being sacked. Lehman Brothers has gone bankrupt and Merrill Lynch has been sold off in a distress sale to Bank of America. Who's next? Nobody knows.

Here's what has been worrying investors: Tomorrow if Fidelity or Franklin or Prudential or Sun Life or BNP-Paribas or Morgan Stanley or any of the others go bankrupt or are nationalised or otherwise cease to exist, will there be any impact on the money that you've invested in their fund?

The simple answer is that your money is safe. In Indian law and accounting, there's a sharp distinction between the fund company's own money and the investors' money that it is managing. Investors' money does not even go to the fund company. The money stays with a custodian and is just invested under the instructions of the AMC's fund manager.

To take a concrete example, let us see what would have happened if Lehman Brothers had owned a mutual fund company in India. When Lehman went bankrupt, its creditors would have a right to the AMC's assets (like its offices for example). The creditors would not have the right to investors' money. In such a case, the AMC would either get a new owner or it would be wound up. In either case, investors would get their money back.

Of course, I'm not discussing any losses that your investments would make as a result of declining markets. That market risk of dropping NAVs remains for all funds whether they are run by an Indian AMC or a foreign one.

Courtesy: Valueresearchonlin

In addition, please read the following extract from the workbook published by Association of Mutual Funds of India.

QUOTE
A mutual fund in India is constituted in the form of a Public Trust created under the Indian Trusts Act, 1882. It should be understood that a mutual fund is just a pass-through vehicle. Under the Indian Trusts Act, the Trust or the Fund has no independent legal capacity itself, rather it is the Trustee or Trustees who have the legal capacity and therefore all acts in relation to the trust are taken on its behalf by the Trustees. The trustees hold the unit-holders money in fiduciary capacity, i.e., the money belongs to the unit holders and is entrusted to the fund for the purpose of investment. In legal parlance, the investors or the unit-holders are the beneficial owners of the investments held by the Trust, even as these investments are held in the name of the trustees on a day-to-day basis.
UNQUOTE

The investments being managed by the mutual fund does not belong to them hence no one can claim them except the unit holders who invested in the fund. Investors of mutual funds need not panic about their investments even if the mutual fund files for bankruptcy.

Best of luck,
SRIKANTH SHANKAR MATRUBAI