Close-ended MF schemes draw investors despite risk tag

Close-ended equity schemes launched by fund houses in the past few weeks have seen a good response from investors despite the mandatory lock-in nature, which makes them riskier than open-ended ones.

Three recently concluded new fund offerings (NFO) have collected a sizeable sum of money, data collected by FE shows.

Axis Small Cap Fund collected around R180 crore, Reliance Close-Ended Equity Fund Series A has mopped up about R250 crore, while ICICI Prudential Value Fund Series 2 has garnered around R400 crore. In October, ICICI Prudential Value Fund Series 1 garnered around R600 crore through its NFO, while Union KBC Trigger Fund ? Series 1 managed to collect a decent sum of R35 crore.

Reliance MF, ICICI MF and Union KBC MF are looking to piggyback on their success with more such funds in the coming months.

Cumulatively, these schemes launched over the last two months have drawn in more than R1400 crore. ?It was a bit to difficult to convince investors to put in money but we managed to do that. At this point, we are comfortable with collecting lesser money as long as it is long-term,? said Karan Datta, national sales head, Axis MF.

Raghav Iyengar, executive VP & head ? retail & institutional business, of ICICI Pru MF seconds this: ?We tapped the banking channel, national distributors as well as IFAs to sell these schemes to investors. Outdoor and print advertising as well as good brand recall among investors also helped.?

Fund officials said the close-ended nature of these schemes will help prevent a churn in the portfolio and help in long-term wealth creation.

?Investors have a tendency to time the market and exit at the wrong time; we are trying to change that mindset,? said Sundeep Sikka, CEO, Reliance MF.

Added Iyengar: ?Fund managers don?t have to worry about day-to-day churn in these schemes.?

Since closed-end funds come with a lock-in, investors can exit only at the time of maturity, making them riskier than open-ended schemes.

A few fund houses, however, have tweaked their schemes to mitigate these concerns. For instance, the Union KBC scheme has the option of automatically redeeming the investor?s investment once the NAV of the scheme appreciates 30%.

ICICI Prudential MF seeks to pay out regular dividends to investors based on attaining certain portfolio targets. Some industry observers, however, argued that the high commissions paid to distributors, and not the inherent attractiveness of the schemes, had contributed to the success of these close-ended NFOs. Upfront commission for close-ended equity schemes can be as high as 6-7% compared with 1-2% for open-ended equity schemes.

The recent surge in the number of equity NFOs is welcome for an industry that has seen sustained outflows in equity schemes since the entry load was enforced in August 2009.

The number of equity NFOs has been steadily declining with just 17 NFOs being launched in 2011 and 2012. This is much less than the 89 NFOs that were launched at the height of the NFO boom in 2007 and 2008. Till October, nine equity NFOs have been launched.

Equity schemes have seen consistent outflows in the last two years, with net outflows totalling over R10,000 crore in calendar year 2013.