Only nine of 187 closed-end schemes outdid their benchmarks this year

Schemes which did better than their underlying indices managed Rs 1,158 cr of investor money. The laggards had assets worth Rs 33,612 cr, shows Business Standard analysis

The Covid-19 pandemic and attendant market volatility have taken a toll on closed-end schemes maturing in 2020-21.

A Business Standard analysis of 187 such schemes across asset classes showed only nine had given higher returns than indices against whom their performances are measured over the last one year. All others had given lower returns, some with double-digit underperformance compared to their benchmarks.

The schemes which did better than their benchmarks managed Rs 1,158.4 crore of investor money. The underperforming schemes had assets worth Rs 33,612.3 crore.

A close-ended scheme doesn’t allow investors to take their money back for a defined period of time. This is often expected to help the fund manager take a longer-term view on their investments, not being swayed by redemption pressure from investors.

Dhirendra Kumar, chief executive officer of fund tracker Value Research said that the fact that the money is locked in can also work against performance. Fund managers in open-ended schemes get more money to manage if they outperform. There is no such incentive for close-ended schemes. A lot of mutual funds whose open-ended schemes weren’t doing well launched close-ended schemes in a bid to gather more assets. Such schemes also provided higher commissions to distributors, a practice which the Securities and Exchange Board of India clamped down on recently. This has also affected the popularity of such schemes, according to Kumar.

"People are not launching close-ended schemes anymore," he pointed out.  

Suresh Sadagopan, founder of Ladder7 Financial Advisories said that investing in close-ended equity or hybrid schemes make little sense. Debt funds have some advantages since it can lock-in yields at the time of investment.

“Interest rate risk is taken care of in a close-ended fund,” he said.

Underperformance relative to fixed income benchmarks could be because they are harder to replicate because of factors such as the illiquid nature of the debt market, according to Kumar.

At least three asset managers have sought longer tenures for their close-ended schemes since November.

 

HDFC Asset Management Company announced that it would be converting the ‘HDFC HOF -I - 1140D November 2017 (1)’, a plan under HDFC Housing Opportunities Fund - Series 1, “from a close-ended thematic equity scheme to an open ended equity scheme following housing and allied activities theme at the end of the current tenure of the Scheme i.e. with effect from January 19, 2021…”

Nippon Life India Asset Management announced the rollover of the Nippon India Capital Builder Fund IV - Series B.

“Currently, with the economy gradually coming out of lockdown and anticipated improvement in macro-economic scenario, we expect the prevailing narrow market trend to reverse. Therefore, the prevailing market conditions offer attractive investment opportunities wherein the fund may benefit from anticipated market broad basing over the medium term…Accordingly, the revised maturity date of the Scheme will be January 6, 2023,” said a 10th December communication to investors.

IDFC Asset Management Company rolled over the IDFC Equity Opportunity - Series 4.

“It is proposed to rollover the Scheme with the objective to provide the fund adequate runway to benefit from the expected recovery… and achieve the desired fund objectives,” said the November 20 investor notice which sought to extend the tenure by two years. 

The money is refunded if they do not choose to continue with the scheme.

All three have underperformed indices against which their performance is measured. 

Emails sent to the three asset managers did not immediately receive a reply.