MFs, agents coax unit-holders to move funds from close-ended to open-ended plans at maturity

MUMBAI: The close-ended schemes launched by mutual funds in recent months still have over two years to go before winding up. But, the asset management companies with the help of distributors are planning well in advance to ensure that the investors’ money stays with them at the end of the scheme’s duration.

Distributors are coaxing unit holders to switch the money invested in these close-ended schemes to another open-ended product of the same fund once the product tenure ends. They are doing this by asking clients to sign an additional form agreeing to shift the proceeds of the close ended fund. Some fund houses have a column within the application form of the close-ended scheme that will ensure a switch without additional signatures.

Some of the new fund offers ( NFOs) available include DSP Blackrock’s three-year close-ended fund and Sundaram Select Small Cap Series 2. While DSP’s NFO has a separate switch form, Sundaram Select Small Cap Series 2 merely has a column which needs to be filled and does not need any signature.
So, if an investor signs this form, the proceeds will move directly to the one mentioned in the form. Critics said this may not be in the best interests of the investor as it is the distributor who fills up the form for his client in many cases.

“Given that the current flavour is equity and past performance of equity mutual funds has been good, many investors consent to switch over to another equity scheme of the fund house on maturity,” said a Mumbai-based distributor. There are no restrictions on such switches as per rules but there are concerns that many distributors might be misusing it. By getting investors to commit the investment well in advance, distributors are ensuring themselves a fee. Distributors are compensated in two ways for selling mutual funds. One is upfront brokerage, which they earn when the investment in made. The second one is the trail income they earn, which is paid on a monthly basis, till the investor stays invested with the fund house.

In case of close-ended funds, distributors are paid an upfront brokerage with no trail income. In a close-end fund, typically distributors are paid an upfront fee of 5-6% with zero trail fees for an equity fund with a three-year tenure.

At the end of the tenure, the funds are redeemed and the redemption proceeds go directly into the investor’s account. Now, if the distributor gets his client to switch, the redemption investors’ bank account, will be switched to an open-end scheme from the same fund house. Critics said this denied the investor an opportunity to take home the money in case the market conditions turn bad.

“Investors should consider the scheme carefully into which they switch into, as the exit load of that scheme will be applicable, once they switch at the end of the tenure,” says Harshvardhan Roongta, certified financial planner, Roongta Securities. As per data from Value Research, close-end equity mutual fund NFOs have mobilised Rs 7,300 crore since April 2013.