Closed-end funds gain traction: Since 2017, 47 such schemes launched

Since 2017, 47 such schemes launched; mopped up Rs 175 billion

After two consecutive years of lull, the launch of closed-end funds has gained traction in the past year.

In 2017, 47 closed-end schemes were launched, which collectively mopped up Rs 175 billion. This is more than the combined amount collected in 2014, 2015, and 2016. This year so far, 11 funds have hit the market.

“In general, the appetite for these funds grows whenever the markets are buoyant,” said Kaustubh Belapurkar, director (fund research), Morningstar Investment Advisor India.

The benchmark BSE Sensex returned 28 per cent in 2017. It rose another 5 per cent in January, but since then it has given up the gains and is down 1 per cent year-to-date.

Closed-end schemes had become a cult favourite with the mutual fund sector in the second half of 2013, as the equity market sputtered back to life.

According to sector officials, the new norms on scheme categorisation might offer a fillip to the launch of more closed-end equity products.

The Securities and Exchange Board of India has broadly classified all schemes under 10 categories of equity funds, 16 categories of debt funds, and six categories of hybrid funds. Fund houses can only launch one scheme under each of these categories. However, closed-end schemes have been kept outside the ambit of this categorisation, which means there is no upper limit on how many such schemes can be launched by each fund house.

Closed-end funds are considered riskier than open-end ones, since their lock-in nature prevents an exit in case the market tanks. However, fund houses in favour of such schemes argue their closed-end nature helps long-term wealth creation and the lack of churning is a relief for fund managers.

“There is nothing that a closed-end fund can do, that an open-end fund can’t. Investors should opt for these funds only if they are looking for a special theme to invest in,” said Belapurkar.

In the past, inflows into closed-end offerings have been largely driven by the high commissions paid to distributors, with the commission for the entire lock-in period paid upfront, experts said.