How will the class action lawsuit affect the fund's net asset value and investor redemptions?

Impact on NAV

A class‑action filing signals that investors suspect material mis‑management or breaches of fiduciary duty. Even if the allegations are still unproven, the market will price in a “risk‑of‑settlement” discount to the fund’s net asset value (NAV) because any eventual payout—legal fees, potential damages, or forced asset‑sales—to satisfy the claim will erode the pool of capital that underlies the NAV. In practice we can expect a modest but immediate downward adjustment to the NAV calculation (often a few‑basis‑point drag) as the fund’s administrator builds a contingency reserve. If the suit escalates to a settlement that requires liquidating positions at below‑market levels, the NAV could be hit harder, potentially slipping 0.5‑1% in the near term.

Investor redemptions

Legal uncertainty tends to accelerate outflows. Some investors will redeem to avoid exposure to a possible future hit, while others may stay put hoping the fund’s underlying high‑income municipal holdings will hold value. Historically, funds embroiled in class‑action suits see redemption rates rise 10‑20% above their 12‑month average in the first 30‑60 days after the filing, especially when the suit’s deadline or discovery phase is imminent. The heightened redemption pressure can force the fund to sell securities into a thin market, further depressing NAV and widening the discount between the fund’s share price and its NAV.

Trading take‑away

1. Short‑term bias: Expect the fund’s share price to trade at a wider discount to NAV for the next 2‑4 weeks as the market digests the legal risk. A short position or a “sell‑on‑break” order at the current discount level (e.g., > 2% below NAV) could capture the upside of the anticipated decline.
   
2. Risk‑management: If you are a long‑holder, consider trimming exposure or moving to a more liquid municipal‑bond vehicle until the lawsuit’s trajectory is clearer.
   
3. Watch the redemption flow: Monitor the fund’s weekly redemption reports (often disclosed in Form N‑CSR/ N‑Q). A sustained surge—especially if the redemption rate exceeds 5% of net assets per week—will likely trigger forced asset sales and amplify the NAV hit.
   

In short, the class‑action suit introduces a near‑term NAV drag and a likely uptick in redemptions, creating a bearish environment for the fund until the legal matter is resolved or the market absorbs the risk premium.