Fund houses launch many close ended NFOs

The past couple of days have seen three fund houses launching three-year close-ended diversified equity funds. SBI Mutual Fund, Reliance Mutual Fund and LIC Mutual Fund are the latest to join the close-ended fund bandwagon.

While all three funds carry fancy names, how different these are from the existing bouquet of funds by the abovementioned houses remains to be seen. With benchmark indices at stratospheric levels, it appears that fund houses cannot seem to resist the short-term favourable climate for mobilising fresh assets from retail investors.

At the end of ’05, there was only one close-ended growth scheme. So far in ’06, already 10 close-ended growth schemes (excluding the abovementioned schemes) have hit the market. More are in the pipeline for regulatory approval.

Sebi issued a circular in April that said open-ended schemes would have to charge the initial expenses in the entry load of the scheme itself or should be paid by the asset manager. Earlier, funds could charge up to 6% of funds collected in a new fund offer (NFO) as expenses.

This means, if a fund collected Rs 1,000 crore, it could spend Rs 60 crore on advertising and marketing and charge it to the fund over six years, an accounting practice known as amortisation. This put long-term investors at a disadvantage as they bore the burden of expenses longer than those who exited earlier.

Off the record, asset management company (AMC) officials agree that the regulation, allowing close-ended schemes to amortise expenses over the life of the plans, is the primary reason why there is a spurt in NFOs of close-ended schemes.

Market watchers also allege that close-ended schemes, which are variants of their existing open-ended products, help fund houses skirt the Sebi diktat to trustees of AMCs to certify that a new scheme being launched is not similar to any of the company’s existing ones. But the regulator is closely watching the situation and some tightening of guidelines may be on the anvil.

“You haven’t heard of the last of it yet,” Sebi chairman M Damodaran told reporters on Wednesday, when this trend was pointed out to him. SBI MF on Wednesday announced launch of its region-specific equity scheme, One India Fund, which is to invest in diversified stocks, while aiming to pick best investment opportunities from all regions of the country.

 The scheme will be looking for stocks based on region, where company’s headquarter is located or where maximum revenues come from. Besides, the fund house has set up a team of four fund managers and four sectoral analysts to decide the course of investments.

On being questioned as to how the fund was different from the several funds already under its mangement, SBI head of equities Sanjay Sinha said that the scheme will allow fund mangers to have better focus while choosing stocks. How first arbitrarily putting stocks into separate baskets and then pooling them with regular parameters will help, is anybody’s guess?

While explaining about LIC’s India Vision Fund, CEO N Mohan Raj explained, “The emphasis will be on undervalued stocks in the ‘mid and small cap segment’, especially in the infrastructure, agriculture, retail, services and hospitality industry.” LIC already has four existing open-ended equity diversified funds.

Reliance’s Long Term Equity Fund also claims to invest in select small and mid-cap stocks, which have the potential to grow and deliver attractive returns. Reliance already has five equity-diversified funds called Equity, NRI Equities, Equity Opportunities, Growth, Vision funds.

The objective of Reliance’s latest offering is “to offer attractive growth potential to investors who have a long-term horizon.” However, it is true that close-ended funds enable fund managers to have better flexibility while investing, since they do not have to be on their toes in case investors want to withdraw their money.

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