Of 27 close end equity schemes, Sundaram MF and ICICI Prudential MF have launched half of them.
Closed ended equity funds seem to be the most preferred way for fund houses to attract investors.
Nine fund houses have collectively launched 27 closed end equity funds till July 2014. In just nine months, these fund houses have mopped up close to Rs. 4,412 crore from investors. Sundaram MF and ICICI Prudential MF have collectively launched 13 NFOs in the past eight months.
The trend of close ended funds started with IDFC’s Equity Opportunity Fund in April 2013. This fund garnered Rs. 253 crore during its NFO period. ICICI Prudential MF was the highest grosser in close end equity fund category. The fund house collected Rs. 643 crore from the NFO of ICICI Prudential Value Fund Series 1.
Note: No close end equity funds were launched from June to October 2013 and April 2014.
Industry experts are of the view that the sales was driven by high commission payouts. Typically, close end funds pay the entire three to five year commission upfront. Industry sources said that fund houses pay an upfront commission of 5-7% to distributors. Based on the total collection from NFOs, a rough calculation indicates that nine fund houses have paid a whopping commission of Rs. 225 crore to distributors.
While close end funds have met with reasonable success, some distributors are not comfortable recommending such funds to their clients. “History tells us that close end funds have not done well. Also, if the valuations are attractive then money should come in existing open end funds as well. Investors will invest in close end funds with an expectation to make money in three years. If market falls then their expectations will not be met,” said a Mumbai based distributor.
Majority of these funds aim to invest in mid cap companies and stocks which are available at attractive valuations.
Nisreen Mamaji of Moneyworks Financial Advisors believes that such funds can deliver optimal returns since fund managers have no redemption pressure. Also, such funds are good to maintain discipline among investors, she added.
Value research data shows that IDFC Equity Opportunity Fund – Series has delivered an absolute return of 114% in a year as on July 2014. In fact, this fund has performed better than other open ended funds like IDFC Sterling Equity Fund and IDFC Premier Equity Fund which have similar mandate during a one year period. However, it’s difficult to ascertain if closed end funds can sustain such performance in future.
It remains to be seen whether these funds live up to their expectations.
