Returns on close-ended MFs lag those on open-ended ones

Open-ended schemes are either on a par or in some cases better than closed products

The much hyped close-ended mutual fund equity funds have not been able to have an impressive performance compared to their open-ended counterparts. The period between 2013 and 2015 witnessed a sudden surge in closeended products by India’s fund houses, which were embedded with high commission to distributors – to the tune of eight per cent in some cases.

Against expectations that closeended products allow fund managers to have better room to manage money as investments are locked for a certain period and investors are not allowed to redeem their units, it appears open-ended schemes are either at par or in some cases better than closed products.

Consider this: The average return of close-ended equity schemes in the small-cap category over the past one year stands at 2.86 per cent, while that of open-ended category is at 6.57 per cent. In the mid-cap space, closeended schemes offered an average return of five per cent, while openended schemes offered 4.9 per cent. Further, in the multi-cap category, one-year return of close-ended products was 5.4 per cent while that of open-ended was 4.93 per cent.

In the three-years horizon, the average annualised return of open-ended schemes in all the three above-mentioned categories was 24.4 per cent. Only five close-ended schemes have completed three years, which were launched during 2013-2015 and have an average return of 26.3 per cent.

Series 1 and Series 2 of ICICI Prudential Value Fund were launched in November and December of 2013. Their three years’ return stand at 22.44 per cent and 23.19 per cent as on January 2, 2016. Reliance Close Ended Equity Fund - Series A was launched in November 2013. It has a three-year annualised return of 21.23 per cent, while that of Axis Small Cap Fund stands at 28.61 per cent.

According to fund experts, sharp volatility in markets in 2015 and 2016 might have restricted the performance of close-ended equity schemes. By nature, such funds are closed for further subscription. So, the schemes did not see any extra inflows when the markets were trading lows and restricted fund managers to buy more at low prices. On the other hand, open-ended schemes continued to see strong inflows when the markets cracked giving headroom to fund managers to buy at dips.

Kaustubh Belapurkar, director (fund research) at Morningstar India, says: “India’s stock markets in 2015 and 2016 remained almost flat. However, in between, there were quite a lot of buying opportunities as markets were quite volatile amid sharp corrections. Close-ended funds did not get the benefits of inflows during such times and fund managers had to stay invested. But, in case of open-ended schemes, fund managers could buy when the markets were low as inflows remained robust. Probably, this might have led open-ended funds to perform better, narrowing down the performance gap with the close-ended products.”

The inflows in equity schemes have been quite strong over the past three years. Fund managers have been quick to buy on dips with surplus cash in hands. The overall asset under management (AUM) of equity segment surpassed the ~5 lakh-crore mark with average ticket size of systematic investment plan reaching a high of ~3,500.