Phuket Business: Notice and redemption periods

PHUKET: One thing many investors don’t understand when looking at a fund fact sheet, is how long it will take to get their cash back when they sell. There are generally two pieces of information you’re looking for: one is the notice period and the other is the redemption period.

These two things, in addition to a third factor – the amount of time needed for the net asset value to be determined and finalized – determine how long it will take.

Most offshore bond providers will allow a “sell and buy” to be transacted simultaneously – running an overdraft if the sale takes longer to settle.

Of course, this in effect leverages the account. If the sales proceeds take six months or more to clear, it can be disastrous if both holdings decline while the account is effectively leveraged. And if redemptions happen to get suspended completely, a very bad situation could be created.

An easy way to reduce the chances of this happening is to wait until your sale proceeds have settled before issuing the buying order unless, of course, you are confident of your timing and do not want to wait. Just make sure you understand the risk of what you are doing.

If it is a very steady, fixed return type of purchase, the risk is probably minimal since the volatility should be very low. Some aggressive funds, on the other hand, are time-bombs if you get stuck and are leveraged into a second declining one.

So, for practical purposes, if a fund has a 30 day notice period and a monthly dealing date of the 1st, let’s see how this could work. If you put in a redemption order on the 30th, this would mean that the notice period would end on the 30th of the following month and you would get a dealing date about 31 days later.

However, if you put in an order on the 2nd , the notice period would put you just past the next dealing date. This would make your dealing date about 59 days after the order was submitted. This shows that even with the same fund, there can be a big difference simply because of the day you submitted the order, relative to the dealing date.

The third aspect is a bit trickier. I recently had one client wait about two months past the dealing date to receive his proceeds from a “fund of funds”, where one of the underlying funds got into trouble and the accountants took forever to finalize the results. Needless to say he wasn’t very happy about it as there was no official gate and it was an unexpected delay.

If you really like a fund, and it is a part of your portfolio that has a long time frame, notice and redemption periods really shouldn’t pose a problem. Just make sure not to put money into a fund like this if you want it to be accessible within a few days. I generally advise a five -year-minimum time horizon on any risk investment.

Careful planning and a good emergency cash reserve, which you should always have prior to making any investment, will prevent you from worrying about redemption times.

David Mayes MBA lives in Phuket and provides wealth management services to expatriates around the world, specializing in UK pension transfers. He can be reached at 085-335 8573 or david.m@faramond.com.

— David Mayes