Closed-ended funds back in demand

Closed-ended funds back in demand

Call it a sign of changing investor perception or an effect of changes in the mutual fund regulatory framework, the closed-ended funds are the flavour of the season.

Fund houses, such as Reliance, SBI, DSP Merrill Lynch and Prudential ICICI, are finding more comfort in launching these funds, as they provide better investment stability to fund managers.

During the April-October period of the current financial year, the new offers of closed-ended funds mopped up Rs 43,356 crore as compared with Rs 5,072 crore collected by closed-ended NFOs during the same period last year, reflecting an eight-fold growth.

During the first seven months of the current financial year, the closed-ended NFOs shored up Rs 43,356 crore as against Rs 9,005 crore pooled by open-ended NFOs.

Analysts said tax incentives for closed-ended funds may be prompting fund houses to launch more of such funds.

The Securities and Exchange Board of India (Sebi) in May had amended its rules for accounting initial expenses of mutual funds.

The amendment had asked the open-ended schemes to charge initial expenses in the entry load of the scheme itself. It had also permitted the closed-ended schemes to amortise expenses across the lock-in period of the scheme.

“Fund managers would find it much easier to take investment decisions in closed-ended funds, owing to its fixed timeframe. They can identify certain stocks and invest in them. Also, the expenses, such as those on advertising, are spread over the closed-ended period of the fund, which is a gain for the investor,” said N Sethuram Iyer, chief investment officer of SBI Mutual Fund.

SBI MF recently launched its closed-ended One India fund, which aims to invest while focusing on region-specific stocks.

Reliance Mutual Fund, one of the top fund houses in the country, has also planned its first three-year closed-ended fund aimed at investing in mid- and small-cap equities, which will be converted into an open-ended fund after completing the three-year period.

The fund houses are also coming out with capital protection funds, which, as per Sebi rules, need to be of closed-ended nature to ensure the value of basic investment made by the investor.

However, the rising investor reliance on these funds also signals changing investor perception, opting for safer investment schemes in view of market volatility.

“After the May market meltdown, NAVs of many funds went down. But, we do not think that the common investor has changed his interests. Fund houses have realised the benefits of closed-ended funds and are preferring these in view of some market equations,” an industry source said.