Remain invested to gain from value theme revival, say analysts

Stick to open-end schemes where you can enjoy liquidity

ICICI Prudential Mutual Fund (MF) has recently announced the merger of ICICI Pru Value Fund Series 19, a closed-end fund, into ICICI Pru Value Discovery Fund, an open-end scheme. 

The former will mature on June 24. Both funds pursue the value strategy.

Rationale behind merger

Fund houses launch closed-end schemes based on certain themes. Sometimes these themes don’t play out within the scheme’s tenure or have scope for performance left. 

ICICI Pru Value Fund Series 19 has done reasonably well: Over the past three years, it has given a compound annual return of 13 per cent, compared to the average 8.6 per cent given by open-end value funds.

But the value investing theme has revived only recently and may have a lot of steam left. 

“In value investing, the wait for the market to discover the true value of the stocks can be long,” says Amol Joshi, founder, PlanRupee Investment Services. 

He adds that when prices move up, investors are compensated adequately for their patience.   

Liquidity benefit

If you decide to stay with the merged fund, you will get the benefit of liquidity in an open-end fund. 

“This benefit cannot be underestimated. While closed-end schemes are listed on the exchanges, their liquidity tends to be low, due to which investors have to sell at a discount, if they wish to exit,” says Joshi.

Defer tax liability

When you get the money from a closed-end scheme on maturity, there is a capital gain, which has tax implications. 

But the merger of two MF schemes does not lead to tax liability. Investors effectively postpone the tax incidence.

In the merger of the ICICI schemes, investors will be allotted the units of the consolidated scheme if they don’t place a redemption request, or a request to switch to another scheme within the deadline. 

“If an investor takes no action, the fund house will allocate him the units of the surviving or consolidated scheme on the specified date. He will not have to pay any capital gains tax or securities transaction tax,” says Archit Gupta, founder and chief executive officer, ClearTax.

What you should do

Except for some investors who have difficulty staying invested for the long term (they withdraw too soon), most others should stick to open-end schemes. 

Fund houses claim that since there are no inflows or outflows from closed-end schemes, they are able to do a better job at managing them. 

But for investors, there is no guarantee that investing in a closed-end scheme will fetch them better returns than going with an open-end scheme. In fact, since the latter face greater scrutiny, fund houses tend to devote more energy and attention to them. Investing in a closed-end scheme forces you to invest a lump sum at a specific market level. In an open-end scheme, you can invest systematically and get the benefit of cost averaging.