Birla Sun Life Resurgent India Fund -- Series 4 -- New fund offer -- An open and closed case

Raging bull markets bring with them some usual hangers-on — for instance, new fund offers (NFOs) of closed-end schemes by mutual funds. These seek to capitalise on current themes and invite investors to deploy money for specified periods.

One such NFO, of Birla Sun Life Resurgent India Fund – Series 4, is under way and is open until July 7. This closed-end equity scheme with tenure of 3.5 years is betting on revival in the economy and corporate fortunes from some key macro factors — such as expected benefits from implementation of the Goods and Services Tax (GST), the resultant shift from unorganised to organised sectors, and the push to infrastructure spends and affordable housing.

The fund will invest 80-100 per cent of its corpus in equity and related securities with the remaining in money market and debt instruments.

The scheme’s benchmark is S&P BSE 200 and it will invest across market caps. It plans to focus on companies with proven high sales and earnings growth through a bottom-up investing approach.

But investing in a closed-end NFO is not the optimal way of partaking in the expected gains. Here’s why:

New fund offers do not have a performance track record to go by. They could make sense for investors if the investing theme is unique.

That’s not the case with most NFOs, including Birla Sun Life Resurgent India Fund – Series 4. There are several equity-oriented mutual fund schemes including from the Birla Sun Life fund stable that bet on similar growth drivers and sport sterling performance records. These are safer and are also less expensive. The expense ratios of new fund schemes are typically higher, primarily due to a small corpus. For instance, the expense ratios in the regular plans of Series 1, 2 and 3 of Birla Sun Life Resurgent India Fund launched in September 2016, November 2016 and March 2017 are close to the maximum permitted limit of 3 per cent; these schemes have a corpus of ₹100-150 crore.

NFOs start with disadvantages, more so the closed-end ones. That’s because the investment is locked in for a specified period — 3.5 years in the case of Birla Sun Life Resurgent India Fund – Series 4. During this period, investors are not allowed to redeem their units. Yes, units of closed-end funds mandatorily get listed on the stock exchanges, providing an exit option. But this is not really useful, given the poor liquidity for such units on the bourses, as being evidenced in the case of Series 1, 2 and 3 of Birla Sun Life Resurgent India Fund too.

In effect, investors are stuck with closed-end funds until their maturity at which point the units are redeemed by the fund house. But an investor in such schemes has little choice calling it quits if the fund underperforms.

The market may be booming today, but there is no saying where it will be on maturity. If there is a downturn at that point in time, the fund’s value could also have taken a knock.

The default option on maturity in closed-end funds is redemption of proceeds that subjects investors to considerably higher risk unlike open-end funds where the investors can hold on to their units and ride out the rough times.

Closed-end funds could offer to switch redemption proceeds on maturity to other schemes of the same fund house. Birla Sun Life Resurgent India Fund also allows this choice.

But this option and the scheme to switch into need to be specified at the beginning itself during application. This means that investors have to choose a scheme now that will performwell a few years later — a tough ask.

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