Close-ended mutual funds lose sheen

Even as mutual funds, in general, witness record inflows, the interest in close-ended funds appears to be waning. Launches of close-ended funds have dropped sharply in recent years.

Fund houses launched 1,355 close-ended funds in FY14, of which 1,322 were debt funds. The number has since dwindled to a mere 220 new launches in FY17.

While close-ended debt funds fell out of favour due to non-conducive tax changes and higher allocation to risky instruments, equity funds suffered due to the capping of distributor commission.

Close-ended funds that are available under various categories — equity, balanced and debt funds — are launched with a fixed maturity period and can be bought from fund houses only during the new fund offer period. However, they are listed and traded on the BSE and the NSE.

Launch of close-ended equity funds took a knock when the AMFI (Association of Mutual Funds in India) directed fund houses to cap upfront distributor commissions at 1 per cent in April 2015.

The AMFI’s directive was intended to stop distributors from mis-selling close-ended funds due to the higher upfront commissions.

Some of the AMCs had reportedly paid as much as 6 per cent upfront commission to promote these funds.

The number of fund launches dropped from 61 in FY15 to 22 and 18 funds in FY16 and FY17, respectively. Seventeen funds have been launched so far in FY18.

While new fund launches are down, investors are now pouring money into newly launched close-ended equity funds.

AMFI data show that the AUM of these funds as on August 31, 2017, stood at ₹31,736 crore, up almost 50 per cent in the last two years.

This is despite a higher expense ratio and lower returns generated by these funds. Expense ratio of close-ended equity funds was 2.8 per cent as of August 2017 compared to 2.4 per cent of open-ended equity diversified funds.

This made close-ended equity funds deliver 1-2 per cent lower return compared to open-ended equity funds.

For instance, the average one- and three-year annualised returns of close-ended mid-cap funds were at 21 and 17 per cent, respectively, while the returns were 23 and 18 per cent for open-ended equity diversified funds for the same periods.

Until 2014, gains made on debt funds held for more than one year were treated as long-term capital gains, and taxed at 10 per cent flat or 20 per cent with indexation.

But the 2014 Budget increased the tenure for claiming long-term capital gains tax on debt funds to three years. Close-ended debt funds, including fixed maturity plans (FMPs), have lost investors’ fancy since then.

This also resulted in fall in the AUM of close-ended debt funds to ₹1.22 lakh crore in August 31, 2017, as against ₹1.86 lakh crore in March 31, 2014.

Higher allocations in AA and below rated debt papers by FMPs in the last three years in a bid to spice up returns have also landed these funds in trouble. The recent debacle of JP Morgan and Taurus mutual funds is a case in point.

Data compiled from both the BSE and the NSE for the one month period ended September 22, 2017, show that, of the 7,478 close-ended schemes, only 22 schemes saw transaction in the last one month.

Among them, only three schemes were traded more than 10 days in the month.

Prices traded on the exchanges are also quoting at a steep discount to their corresponding NAVs.

For instance, the traded price of the HDFC Dual Advantage Fund-II-1111Days-April-2016-(G) on September 19 on the BSE was ₹9.15, which is at almost 17 per cent discount to the NAV of ₹11.09 for the same day.

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