Close-ended schemes back in race

NEW DELHI: Close-ended schemes are making a comeback in the Indian mutual fund industry. The change in the accounting rules have proved beneficial for these schemes in the last few months. While in the seven years from January 1999, only one close-ended equity fund was launched, the last seven months witnessed seven such funds being launched. In fact, in the current quarter, there have been three new equity funds and all are closed-ended.

Under the new rules, close-ended schemes can charge the investors for the expenditure on marketing, distribution and advertising, whereas for open-ended schemes Asset Management Companies (AMCs) will now have to bear the expenditure. Since most close-ended offer periodic exits, experts say it is the option of recovering ad spends, which is causing the revival of the schemes.

“The revival of the closed-ended schemes is closely linked to the change in the accounting rules, which now allow AMCs to charge investors for their advertising and marketing spend only for such schemes,” said Dhirendra Kumar, CEO, ValueResearch.

Close-ended schemes, which allow the investors to invest only at the time of their launch, can charge for advertising, marketing and distribution spend from the initial issue expenditure, whereas open-ended schemes cannot do so. Open-ended schemes can recover the money only from the entry load.

Since the entry load, typically, stands at around 2-2.5% and is less than the 6% amount that can be recovered through the initial issue expense, for open-ended schemes it is the AMCs that bear a substantial part of the costs of advertising, selling and distribution.

Though fund houses agree that there has been a deluge of these schemes in the last two-three months, most put the blame squarely on market dynamics. “The launch of closed-ended equity funds has started last year and it is just a question of market dynamics,” said Franklin Templeton CIO (Equity) Sukumar Rajah. The fund house, which launched a closed-ended product last month, claims that it has not been affected by the guideline.

Experts say that even the potential money that can be mobilised through close-ended schemes is 30-40%, lower than the amount raised by open-ended schemes.

“Since high net-worth individuals and those preferring liquidity do not find these products attractive, the total money raised is 30-40% lower than an open-ended scheme” said a Birla Sunlife spokesperson.