Four top funds avoid closed-end schemes

HDFC MF, Franklin Templeton Investments, Kotak Mahindra AMC and Tata MF stay away from ongoing rush, for diverse reasons

Closed-end equity schemes have become a hot favourite with the mutual fund (MF) sector since the equity market started sputtering back to life late last year. Still, despite the dash to launch these products, some of the country's top fund houses have chosen not to be part of the frenzy.

To be precise, four of the top 15 fund houses - HDFC MF, Franklin Templeton Investments, Kotak Mahindra AMC and Tata MF - have refrained from launching a closed-end scheme. Surprising, as these offerings were able to garner a little more than Rs 8,000 crore since September last year. Some fund houses have piggybacked on this success by launching a series of such schemes.

"It's not necessarily the best way to invest, as it takes away the flexibility to exit when one wants to," said Milind Barve, managing director, HDFC MF, the country's largest asset manager. He added they had no immediate plan for a closed-end scheme, unless it was a unique offering.

According to Tata MF's Chief Executive Officer (CEO) Arvind Sethi its wide bouquet of open-ended products obviated the need for separate closed-end offerings. A Kotak AMC official reiterated the fund had enough open-ended products to meet investor needs. An email to Franklin Templeton AMC did not elicit any response.

"The Tatas are typically conservative, Franklin does not pay upfront commissions, while Kotak doesn't want to dip into its balance sheet to pay high upfront commissions to sell these schemes. HDFC MF can pay high commissions but for some reason has chosen not to hawk these products," said the CEO of a fund house, on condition of anonymity.

Inflows into closed-end offerings have been largely driven by the high commissions paid to distributors, said market watchers. The upfront commission for closed-end equity schemes can be as high as six to seven per cent, compared with one to two per cent for open-ended equity schemes.

The sustained rally in the market has also aided the sale of these funds, as well as boosted their returns, with funds launched last year making absolute gains of anywhere between 65 per cent and 113 per cent as of December 1.

Apart from commissions, some funds are unhappy with the high cost built into the product. "Since each closed-ended series is effectively a small fund, an investor might end up paying a higher cost than a large-sized open-ended fund," said Barve. He said the cost, or total expense ratio, for managing such a series could be as high as 2.6-2.7 per cent, compared with 2-2.2 per cent for an open-end fund. The total expense ratio (TER) is the annual charge deducted from the net asset value of the scheme; typically, the larger the fund, the less the TER it charges for investors.

Since September 2013, 14 fund houses have hit the market with 57 closed-end schemes, Value Research data show. More than half of these have mopped more than Rs 100 crore each through their new fund offerings, with the UTI Focused Equity Fund-Series I garnering the most (Rs 771 crore). ICICI Prudential MF, Birla Sun Life MF and Sundaram MF have brought out the largest series of such schemes.

Closed-end funds are considered riskier than open-end funds, 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 makes life simpler for fund managers.