No new equity close-ended schemes launched in 2019 after SEBI slashes fee

The curbs on total expense ratio (TER) have put the brakes on launches of equity close-ended schemes in the past few months.

In 2019, not a single close-ended scheme has hit the market, shows the data collated from Value Research.

In the last quarter of 2018, only the month of December saw equity close-ended schemes worth Rs 846 crore getting launched.

In September last year, the Securities and Exchange Board of India (Sebi) slashed the TER for different categories of mutual fund (MF) schemes. For equity oriented close-ended and interval schemes, the regulator said a maximum of 1.25 per cent could be charged for the schemes. The TER for equity-oriented schemes can go as high as 2.25 per cent if the assets under management are below Rs 500 crore.

Inflows into close-ended offerings have been largely driven by the high commissions paid to distributors, said market watchers. The upfront commission for close-ended equity schemes was earlier as high as 6 per cent to 7 per cent, compared with 1 per cent to 2 per cent for open-ended equity schemes. The reduction in commission has, therefore, directly impacted these products, said experts.

Illustration by Binay Sinha
“Close-ended funds have become less remunerative for asset management companies and distributors. Unless they come up with a differentiated product with a compelling investment rationale, fund houses are unlikely to hit the market with such products,” said G Pradeepkumar, chief executive officer, Union MF.

Close-ended funds are considered riskier than open-ended funds, since their lock-in nature prevents an exit in case the market tanks. However, fund houses in favour of such schemes argued their close-ended nature helps long-term wealth creation and the lack of churning makes life simpler for fund managers.

“Indian equities have been quite volatile in the past one and a half years and several diversified equity schemes have lagged the benchmarks. Valuations are not cheap either and this may not be the right time to come up with such offerings,” said Amol Joshi, a distributor.

In 2006, there was a flurry of close-ended launches after the regulator banned open-ended MF schemes from amortising their initial issue expenses. However, investors took a severe beating after the market crash in 2008, resulting in many long-term investors making negligible returns or losing their capital.

These products became a hot favourite again with the sector in the second half of 2013 and calendar year 2014 as the equity market started sputtering back to life.

In October 2017, the market regulator set out new norms for the classification of MF schemes. It was believed that the one-scheme-per-category policy for equity schemes would slam the brakes on new launches. Since Sebi norms were not applicable to launches of index funds, exchange-traded funds, fund of funds, sector/thematic funds as well as close-ended funds, some sector officials believed the new ruling would give a fillip to the launch of more close-ended equity products.

This did come to pass. In 2017, these schemes mopped up over Rs 18,000 crore, while last calendar year till September, schemes worth Rs 9,200 crore had hit the market.

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