Funds raised by close-ended equity NFOs increase by 1400% in 2017

The collection from the new fund offer of close-ended equity funds have zoomed in the calendar year 2017. The close-ended equity schemes raised Rs.10,191 crore in 2017, a whopping increase of more than 1420% from last year, shows AMFI data. Last year, the industry collected Rs.671 crore between January and November 2016. Overall, the industry had collected a total of Rs.1,247 crore in 2016.   

The data also shows that 34 close-ended equity schemes were launched in the current year, while only nine close-ended schemes were launched last year till November.  

Fund houses typically launch more equity-oriented NFOs in bull markets.

Vidya Bala, Head of Mutual Fund Research, FundsIndia.com says that fund houses launch close-ended funds if the strategy of the scheme demands a buy and hold approach. Few advisors say that the lure of sticky money may be one of the reasons behind the launch of close-ended equity funds. Suresh Sadagopan of Ladder7 Financial Advisories says, “As it is sticky asset, it is beneficial for the AMCs as well as the distributor.”

As regards the collections during the new fund offers, experts say that ongoing market rally and lack of knowledge about the risks associated with new fund offers among investors are some of the reasons behind the higher collection during the new fund offers.

Debashish Mohanty, Country Head, Retail Business, UTI Mutual Fund says that funds raised in the NFO period of the close-ended funds is in line with the fresh flows received by open-ended funds, balanced funds either through SIPs or lump sum. “As the market is doing well, investors are pouring in money in equity market through various means. Secondly, as the market is perceived to be overvalued, investors believe that diversified funds will not be able to generate higher returns and hence they are looking for theme-based products that can give higher returns,” says Debashish.

On the other hand, many uninformed first time investors invest in these funds as they view NFOs as IPOs. “The trend of do-it-yourself investor is growing. Many investors buy into these schemes as they are of the opinion that NFOs are cheap and are equivalent to IPOs. The lack of awareness among investors is also the reason behind the higher collection from the new fund offers,” says Vidya. 

Experts also say that the positioning of schemes may also be the reason behind the large collection.   

“Advisors may be comparing close-ended funds with open-ended products. Some advisors feel that the closed end structure enables the fund managers to have a more long-term focus as there is no redemption pressure. Secondly, they may be selling close-ended funds to help their clients achieve financial goals that are three to five years away,” says Suresh.

Funds raised by close-ended equity funds (month wise)

Source: AMFI

Figures in Rs.crore