Investors can now consider close-ended funds: Nirmal Bang
Despite having fallen out of favour with investors, close-ended funds are back and can be considered by investors, says Nirmal Bang research report.
Close-ended equity schemes which were out of favour in the past five years are back in vogue. At least three fund houses are coming out with close-ended equity schemes in such a volatile environment.
In fact IDFC Mutual fund has already launched its IDFC Equity Opportunity-Series I, which is a three-year close-ended scheme.Other fund houses such as Reliance Mutual Fund and Axis Mutual Fund have already filed an offer document with the market regulator Securities and Exchange Board of India (SEBI) seeking to launch their close-ended mutual fund scheme.IDFC Equity Opportunity-Series I would invest 65% to 100% of its portfolio in equities and the remaining part of the portfolio in debt and money-market instruments. The scheme would invest in a diversified basket of stocks without any capitalization bias. The performance of the scheme would be benchmarked to the BSE 500 Index.The fund will try to pick up stocks on the basis of long track record and good corporate governance of companies. Consistent cash flows or attractive dividend yields will also be considered in the stock selection process along with strong balance sheets of companies.The fund in the initial stage would be in small companies by market capitalization, which is likely to benefit from an expected recovery in the Indian economy.The fund offers a dividend option. A person can also invest in this fund by taking the direct route. The minimum application amount in the fund is `5,000. There is no entry or exit load in this fund. The units will be listed on the Bombay Stock Exchange.According to officials from IDFC MF the main reason for coming out with an equity close-ended scheme is that if there is a reversal in the Indian economy, smaller firms would bounce back faster. This will, in turn, affect their valuations.The basic investment strategy of the scheme is to focus on profit-generation capability, low debt on books, cash flows and good governance of a company.The investment universe for this fund is beyond the top 200-250 companies listed by market capitalization. Therefore, though the fund is not biased towards any market capitalization, the intention is to capture the dormant opportunity in small- to medium-sized companies.Similarly, Reliance Mutual Fund plans to launch a series of five-year and 10-year close-ended equity schemes. The scheme would invest over 80% in equities and the remaining in debt and money market securities. The performance of the scheme would be benchmarked to the BSE 200 index.While Axis Mutual Fund is planning to come out with a scheme with a five year lock-in period, the scheme will automatically turn open-ended after the lock-in period.Let us understand what exactly are close-ended schemes, their features and whether they really benefit retail investors or not.Investors must be aware of the fact that mutual funds are classified according to the nature of their investment, investment philosophy and risk profile. However, equity as well as debt funds differ on the basis of their structure, that is, open-ended and close-ended. The main difference between the two is flexibility of sale and purchase of units.As the name suggests, a close-ended fund is close-ended for its entire term and investors can sell their units only through stock exchanges.The unit capital of close-ended schemes is fixed and investors can sell specific number of units and can buy units only during the new fund offer (NFO) period. This further means that no new investor can enter the scheme once it closes down. Nor can they exit till the end of the scheme’s term.However, to provide a platform to investors to exit before the term in case of an emergency, fund houses list their close-ended schemes on a stock exchange where investors are allowed to sell their units.Trading on a stock exchange enables investors to buy and sell units through a broker in the same manner as transacting shares of a company. The units may trade at a premium or discount to the net asset value (NAV) depending on investors’ expectations of the fund’s future performance as well as prospects.The demand and supply of fund units and other market factors also affect their price. The number of outstanding units of a close-ended fund does not change as a result of trading on the stock exchange.During the boom in the markets between 2004 and 2008, we saw many fund houses coming out with close-ended schemes. During that period, the performance of close-ended schemes was not very inspiring to say the least.In a nutshellThe ban on entry loads and streaks of measures from the market regulator has led to less monetary benefits to fund houses who were shying away from launching close-ended schemes. That the fund houses are coming out with close-ended schemes now means they have done their homework well.However, the ones to gain from this will surely be retail investors. But one has to always remember the thumb rule that returns in equities are not guaranteed and even after staying invested for three years, investors might receive average returns based on movement in the equity markets and stock selection.While considering this product, investors should be well aware of the risks associated with close-ended schemes and only then invest in them. Further, investors should always look at their risk, return requirements and investment horizon, before investing in mutual funds.Source: Nirmal Bang's Beyond MarketClick here to read the full magazine Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
