Closed end equity fund NFO collections set to touch Rs. 9,000 crore

So far, the industry has mopped up Rs. 8,908 crore from closed end equity funds.

The mutual fund industry has collected Rs. 8,908 crore from 42 new closed end equity fund launches in 13 months. Among these, few of them were RGESS. With more closed end funds in the pipeline, the collections are expected to cross Rs. 9,000 crore in the coming months, say fund officials.

Three new closed end equity funds are currently open for subscription- Birla Sun Life Focused Equity Fund - Series 4, Canara Robeco India Opportunities, SBI Equity Opportunities Fund – Series II.  Deutsche is also planning to come out with its closed end equity fund in December.

The recently launched closed end fund from DSP BlackRock mopped up Rs. 670 crore, second highest after UTI’s Focused Equity Fund – Series I which collected Rs. 770 crore. 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.

Experts say that the amount of money raised from these closed end funds is not unprecedented. For instance, Sundaram Energy Opportunities Fund which was launched in 2007 had collected Rs. 2,782 crore. None of the schemes launched so far have matched this number.

Which AMC launched maximum funds?

The highest number of closed funds were launched by Sundaram, three of which were RGESS. Sundaram launched ten closed end funds followed by ICICI Prudential which launched nine funds. Birla Sun Life and Reliance launched six and five closed end schemes respectively.

Why a series of closed end funds?

Fund houses launch series of funds, especially in the case of closed end structure, because of the limited period of the NFO. Not all investors may have the cash flow to invest during the launch of a scheme. Thus, fund houses come up with multiple series so that all investors get an opportunity to invest.

From an AMC’s perspective, the money collected in these NFOs remains invested for three years which ensures that AMCs earn on these assets. From an investors perspective, advisors say that investors typically have a tendency to book profits if they make money and a closed end structure instills discipline to stay invested for a certain period of time.

Differentiating factor

Most of the closed end funds are more or less focused on investing in mid and small cap stocks.

For instance, while majority of the closed end funds will mature after the three year tenure, L&T Emerging Business Fund will become open end after a two year lock in. Another fund from Union KBC stable was a trigger based fund which matured after hitting a NAV of 13 in eight months of the launch. This structure ensured that investors made money within a short span of time without having to wait for three years.  

Vinod is of the view that closed end funds forced investors to look at equities and many investors who entered the market in 2013 have benefitted. Some of the closed end funds launched in 2013 have delivered stellar returns to investors. Value Research data shows that IDFC Equity Opportunities Series 1 has delivered 63% absolute return since launch while ICICI Prudential Value Fund Series 1 has delivered 64% absolute return since launch.

While some these funds might have delivered good returns, experts caution that the closed end nature of the fund does not necessarily benefits a fund. “It’s just a marketing gimmick. There are good open end funds which have performed well. Open end funds have more benefits as compared to closed end funds. A theme which looks good now may not look promising two years down the line. History tells us that closed end funds have not done well,” says a Mumbai based advisor requesting anonymity.

Many of the close ended funds launched in 2007 have either been merged or converted into open end funds. UTI - Infrastructure Advantage Fund – Series I, a close ended fund, got merged into UTI - Infrastructure Advantage Fund in 2011. Birla Sun Life Long Term Advantage, a close ended fund matured in October 10, 2011 and was converted into open ended fund thereafter. Religare Mid-cap Fund, SBI Infrastructure Fund, Sundaram BNP Paribas Select Small-cap Fund, DSP Black Rock Micro Cap Fund and Kotak Emerging Equity got converted into open end.  Most of these funds were launched in 2007 when the markets were at peak. Only UTI India Lifestyle Fund and UTI Wealth Builder Fund are still in existence among the funds launched in 2007-08.

Experts say that the trend of closed end fund launches will continue for some time due to the positivity surrounding the market.

Closed end fund launches