After months of lull, closed-ended funds are once again gaining some momentum. Thanks to the attractive commissions ranging between 4 and 7%, AMCs such as ICICI Prudential, HDFC, Axis, Union KBC have rolled out products to woo investors.
Between May-October there were absolutely no launches of closed-ended equity funds, but in November, three fund houses, ICICI Prudential, HDFC, Axis and Union KBC, launched such schemes and as many as another half a dozen are in the pipeline in the coming three months.
Further there are new series of such schemes also being rolled out.
Mutual fund experts explain that higher commission on such products are the reasons for the comeback. “The structure of the close ended fund is such that it enables AMCs to incentivise the sale. Unlike an open-ended fund when an investor can redeem any time, here your money is locked and so the fund houses can pay a higher commission for the sale of such funds,” said Dhirendra Kumar of Value Research.
The commission earned by agents on a closed-ended equity scheme is way higher than the 0.75% that is given for open ended schemes.
Srikanth Meenakshi, co-founder, Fundsindia.com explains that, “the launch of such funds is being done for asset gathering purposes. Since markets have been performing better investor-interest is picking up. The idea is to tap the interest and keep the money locked in, as it happens in these funds.”
But should the investors get lured by these schemes? Financial planners advice against it.
“In a closed-ended scheme the money is locked in. So if investors wants to sell out then they will have to sell the fund-units on the exchanges. And they trade at a big discount to the NAV,” says Kumar.
Moreover, for retail investors, investment through Systematic Investment Plan (SIP) is supposed to be the ideal route, however, this scheme doesn’t allow you that. Apart from this, there are no track records to base your investments on and therefore the risk associated with the product is higher, explains Meenakshi.
In close ended funds, liquidity is another big concern. Fund managers, on the other hand, argue that a lock-in period ensures no redemption pressures and that could churn better returns.
Hefty commissions
Unlike an open-ended fund when an investor can redeem any time, the money is locked and so the fund houses can pay a higher commission for the sale of such funds.
The commission earned by agents on a closed-ended equity scheme is way higher than the 0.75% that is given for open ended schemes.
If investors wants to sell out then they will have to sell the units on the exchanges. And they trade at a big discount to the NAV.
Fund managers argue that a lock-in period ensures no redemption pressures and that could churn better returns.
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