Interestingly in the US, closed-ended funds are fast becoming extinct as the Securities Exchange Commission (SEC) is noticing the deep discounts at which these listed funds are trading in the market and are therefore urging fund managers to offering a repurchase provision in such schemes, so that the investors can get out at NAV.

``In the US, most closed-ended schemes have an in-built discount programme. These are typically in the form of provisions that allow shareholders or board of directors to vote on whether or not to convert the scheme into an open-ended one. Such votes are automatically triggered once a certain level of discount is breached,'' said themanaging director of a mutual fund.

Recently, the SEC cleared a `discount-buster' provision for a close-ended scheme - The Dressauer Global Equity Fund. This provides for automatic conversion of the scheme into an open-ended one if the units continue to trade at a discount of more than 5 per cent to the net asset value for 15 consecutive days.

``In India, if this provision is given to unitholders, it will give them a lot of freedom and flexibility to change the way these mutual funds are handled,'' said SBI Mutual Fund managing director Naimatullah.

In the Indian context, it is not uncommon to find schemes trading at discount of almost 50 per cent to the NAV, and in some cases for years together. However, the issue here is more than that of discounts only. There are instances where unitholders of close-ended schemes have been forced to watch helplessly as their investments erode on account of sheer inactivity of fund managers, further helped by a sustained downswing in the market.``These schemes whichare typically trading at huge discounts to the NAV should be made open-ended. This will give investors an opportunity to exit at least at the prevailing NAV instead of incurring huge losses in the secondary market,'' said Tata Asset Management Company managing director KN Atmaramani.

The Taurus Mutual Fund trio - Starshare, Genshare and Newshare - the Morgan Stanley Growth Fund and the Apple Goldshare Fund are cases in point. The NAVs of these schemes have been languishing below par for years together with some of them listed at a discount of almost 50 per cent to the NAV. Apple Goldshare plans to go open-ended in July.

The unitholder feels trapped between devil and deep sea since staying invested would mean an erosion in investments while opting out would entail large sacrifices in the secondary market. A closed-end scheme favours the fund manger as it imposes practically no penalty on him who fails to deliver. With the unitholders' funds comfortably locked in for a five-year period, there is littlepressure on the fund managers to turn in a reasonable investment performance.

In the Indian context, the problem is all the more acute, because the performance of fund managers is never evaluated on a personal basis.In the US, where the performance of funds is inevitably traced to the fund manager, his personal reputation and career are at stake.

It is imperative for regulators to look at close-ended schemes.The Securities and Exchange Board of India (Sebi) should allow unitholders the right of demanding conversion when their interests are being seriously compromised by indifferent management or by adverse market conditions. Alternatively, they should be allowed to force closed-end schemes to introduce repurchase option when the discount crosses 10 per cent.