Closed end funds have made a comeback to cash in on the recent market correction. While two closed end funds are currently open for subscription, others are awaiting SEBI approval.
The two closed end funds which are currently open for subscription are Birla Sun Life Emerging Leaders Fund - Series 7 and ICICI Prudential India Recovery Fund - Series 4. ICICI Prudential India Recovery Fund - Series 4, a three year closed end fund, will invest in stock 15-20 high conviction large cap stocks. Birla Sun Life’s Emerging Leaders Fund, a close-ended fund with a tenure of 3.5 years, will invest in small and mid-cap stocks that have a potential to appreciate in the long run.
Fund officials say that the recent correction has provided a good opportunity for investors to enter the market. A. Balasubramanian, CEO, Birla Sun Life MF said, "India's macro outlook remains constructive and more resilient compared to other markets. The steps taken by RBI and government are positive. Also, the valuations are reasonable. We see potential for value picks in small and mid-caps as the concentration of domestic economy is inclined towards that segment. Our new fund seeks to use a bottom up investment approach and focuses on stock picking to drive alpha. This would be a good opportunity for investors to make the most of this growth phase over the 3.5-year horizon.”
Sensing an appetite for closed end funds, more fund houses are rushing to file offer documents with SEBI to launch such funds. Kotak MF has filed an offer document to launch a closed end diversified fund called Kotak India Growth Fund which will invest across sectors and market capitalization. Similarly, Canara Robeco has filed an offer document to launch two series of Canara Robeco Equity Opportunities Fund.
Sundaram MF is planning to launch Sundaram Value Fund which will invest in stocks which are available at more reasonable valuations when compared with peer group or stocks that are currently not in favor but are fundamentally strong.
The trend of closed end fund NFOs started with IDFC’s Equity Opportunities Fund in 2013. While the funds launched in 2013 have delivered decent returns to investors through dividends, these funds are down by 10-13% if we see the last one year return, due to the recent correction. Nevertheless, if you look at the returns since launch, some of these funds have lived up to their expectations. For instance, IDFC Equity Opportunities Fund Series I has delivered 32% return since launch. The fund is set to mature in April 2016. Similarly, Axis Small Cap Fund has delivered 30% return since launch and matures in November 2018. Also, Sundaram Select Micro Cap Series which was launched in 2013 has delivered 42% return since launch.
However, financial advisors are not gung ho about recommending closed end funds to their clients. “Open end funds are as good as closed end funds. There is a case for investing in closed end funds when you want to instil discipline in investors in order to stay the course. However, one positive trend this time around is that there has been no panic redemption pressure from investors. So I don’t feel the need to recommend investors to stay locked in for three to five years in closed end funds,” says Pallav Agarwal, a Delhi based advisor.
Renu Pothen, Research Head, Investment Advisory Division, Fundsupermart too seconds Pallav’s views. "We believe that open-end is a better structure. If similar funds are available in open-end structure then it is better to invest in open-end funds."
