Close-ended schemes falter despite market rally


Close-ended equity funds have historically been popular with mutual fund companies. But a number of these launches have spectacularly underperformed, despite the huge rally in stock markets over the past year.

In a notice issued on Thursday, Aditya Birla Sun Life Asset Management Company announced the merger of the Aditya Birla Sun Life Resurgent India Fund Series 7 with Aditya Birla Sun Life Equity Advantage Fund. Despite having risen 69% this year, the Series 7 scheme is up only 5% since it was launched in April 2018 (as of 1 September).

In comparison, the S&P BSE 500 is up 15.75% CAGR (compound annual growth rate) over the same time period.

Existing unitholders have been given the option to exit by 4 October, which is the maturity date of the scheme.

It is not the only such scheme. In November 2020, IDFC Mutual Fund sought “roll over”, or extension, of a close-ended fund called IDFC Equity Opportunity Fund Series 4 launched in December 2017. The scheme had delivered -11.15% CAGR since launch (around -30% cumulatively) as of 25 November 2020 compared with 5.48% on the S&P BSE 500.

A close-ended scheme is a mutual fund with defined dates of entry maturity. However, these dates may not coincide with market cycles at times the maturity dates can come up at times of gross underperformance.

On the debt side as well, close-ended funds have faltered. Kotak Mahindra Asset Fund was forced to extend fixed maturity plans (FMPs), which had exposure to Essel Group companies in April 2019, an act that invited a Sebi fine last week.

In the context of Aditya Birla Sun Life Resurgent India Fund Series 7, A. Balasubramanian, its chief executive officer, said, “It was a close-ended fund with a specific rural theme. It is coming for maturity, that is being merged with one of the open-ended funds to continue the investment in a diversified equity fund.”

Amol Joshi, founder, Plan Rupee Investment Services, highlighted the dangers of schemes being launched close to market peaks. 2017-18 marked a peak for mid- small-cap segments relative to large-cap companies. A surge in their stock prices prompted some fund houses to stop inflows into their mid- small-cap schemes.

For instance, the S&P BSE Small Cap 250 rose 57% in calendar year 2017, attracting heavy flows into such funds.

This was followed by two years of negative returns with the index dropping 23.62% in calendar year 2018 another 8.44% in calendar year 2019.

“Investors should stay away from close-ended equity funds; there is no advantage to them. Also, this underlines the fact that mutual funds launched at the peak of a cycle can underperform for many years even as the market recovers,” said Joshi.

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