Experts believe that such strategy works well if the fund is prone to volatility and liquidity. However, many experts say that it doesn’t create much difference in the performance of a fund.
Since May 28, IDFC Mutual Fund has re-opened the lump-sum subscription in its flagship scheme - IDFC Premier Equity Fund.
So far, the fund house has opened this scheme seven times, each time with a target to collect 20-25% of its total corpus. Starting its journey in 2005 with Rs. 300 crore, the fund has now grown to Rs. 5,345 crore as on 31 July, 2014.
Value Research data shows that the IDFC Premier Equity Fund has delivered CAGR of 22% since inception. The fund has consistently outperformed its benchmark. It has given CARG of 22% in both 3 years and 5 years period.
Kenneth Andrade, Chief Investment Officer, IDFC Mutual Fund said, “The idea is to provide long term wealth appreciation to investors. Currently, the stock market provides an opportunity to build such a portfolio. Hence, we have announced re-opening of lump sum subscription. We have a target to mop up at least 20% of average assets under management (AAUM) i.e. close to Rs. 800 crore.” So far, the fund has collected fresh inflows of over Rs. 500 crore.
Though the fund has delivered superior performance, it is difficult to ascertain if closing the fund for continuous inflows has indeed helped the fund perform better. Let’s look at the performance of a few open end funds which are similar to IDFC’s fund. Reliance Equity Opportunities Fund and ICICI Prudential Value Discovery Fund have outperformed their respective benchmarks by a healthy margin. Both these funds have delivered CAGR of 22% and 25% since inception respectively. While Reliance Equity Opportunities has given CAGR of 24% (3 years) and 23% (5 years), ICICI Prudential delivered CAGR of 31% (3 years) and 24% (5 years). Similarly, SBI Emerging Businesses Fund has given a CAGR of 23% since inception.
Vidya Bala, Head – Mutual Funds Research, FundsIndia.com is of the view that closing the scheme for subscription largely depends on the type of the scheme. “The strategy has paid off well since IDFC Premier Equity Fund is a mid-small cap fund. Mid and small cap stocks are volatile. Sometimes, the fund manager ends up deploying cash in money market because stocks tend to be overvalued. Hence, closing the scheme is a good move to minimize risk. However, it doesn’t mean that all equity fund managers should close their schemes for subscription. It depends on type and mandate of the scheme.”
Nikhil Kothari of Etica Wealth Management believes that such strategy works for mid and small-cap funds. “Usually, mid and small-cap stocks have a liquidity issue. Closing subscription of such funds if the size increases is a good move. However, it doesn’t make sense to close subscription of large cap funds.”
Vinod Jain of Jain Investments believes that every scheme has an absorption capacity depending on the fund’s mandate. “It’s not a thumb rule that closing subscription can result in superior performance. Many funds, especially mid and small cap schemes, can only absorb money up to a certain limit. The downside risk of such schemes increases with the increase in size.”
S Naren, Chief Investment Officer, ICICI Prudential Mutual Fund says “If a fund manager believes that the sector in which the fund invests in is not going to do well then it makes sense to close the scheme for fresh inflows. Earlier, we had closed the subscription in ICICI Prudential FMCG Fund for around 10 months.”
G PradeepKumar, Chief Executive Officer, Union KBC MF feels that fund houses should take such calls whenever the market is reasonably valued.
The industry is divided over the issue. When asked about why fund houses don’t close their funds when the AUM becomes too large, Prashant Jain, Chief Investment Officer, HDFC MF had said at Mint MF Conclave “Collectively, mutual funds in India are 2.5% of the entire market capitalization. HDFC Mutual Fund is 0.5% of it and HDFC Equity Fund is 0.1%. So, how is my fund large? It is larger than other funds, but it is not constraining us.”
