Mutual fund investors brace for weak returns in closed-end schemes

Several of these were oriented towards mid, small-cap stocks, which did not play out as expected

Mutual fund (MF) investors in closed-end equity schemes maturing in the calendar year 2020 are bracing for tepid returns, as most of these schemes have underperformed their benchmarks, so far.  

According to the data from Value Research, of the 14 schemes maturing in the next few months, 10 have underperformed their benchmarks since their launch dates, and others are largely on a par with their respective benchmarks.

Experts say several of these funds were oriented towards mid- and small-cap stocks, which have not played out as expected.

“Even within large-caps, we have seen only a few stocks doing well. Within the mid- and small-cap segments, the diversion is even wider. Some stocks have been multi-baggers, while there have been cases of sharp wealth erosion,” said Kaustubh Belapurkar, director-mutual fund research at Morningstar.

Experts say investing in closed-end equity schemes has not worked well as some of the stock picks have failed to match fund managers’ expectations. Some of these schemes were also oriented to value stocks, however, experts say growth investing strategies have done better in recent years. 

“Several of these closed-end equity schemes were floated in 2016-2017 after the markets had seen a sharp rally; investor traction was high in the backdrop of demonetisation. However, quite a few sectors and stocks are yet to recover,” said Amol Joshi, founder of Plan Rupee Investment Services. He pointed out segments, such as PSU banks, which were picked up by fund managers in these schemes, but are yet to see a strong recovery.

 

Advisors say investors can consider re-deploying the funds after maturity of these schemes. “If these investments are part of equity allocation for the investors and these funds are not needed for the next two years, they can be re-invested in open-ended equity schemes,” Joshi said.

Further, talks of the discovery of Covid-19 vaccine both in India and across the world can continue to fuel market recovery, analysts say.

Industry participants sat such schemes are unlikely to see higher traction, given weak returns and the regulator clamping down on closed-ended schemes.

According to industry sources, the Securities and Exchange Board of India has shown reservations to giving approvals to such schemes over concerns of whether such schemes are being managed well by fund houses.

They agree that several fund houses had launched such schemes only to add to their asset base and incentivise distributors with high upfront commissions.

Industry players say investors should avoid closed-end equity schemes as they don’t give any material advantage over open-end equity schemes. “These schemes force investors to lock-in their funds for three-four years, and the returns may not meet expectations despite the long-term commitment,” said a fund manager.