BackMarket rally fails to lift some underperforming close-ended MF schemes
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 markets recover, experts said
PremiumClose-ended equity schemes have historically been popular with mutual fund companies. But a number of these schemes have spectacularly underperformed, despite the huge rally in stock markets over the past year.
Aditya Birla Sun Life Asset Management company on Thursday 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 has risen only 5% since it was launched in April 2018. In comparison, the S&P BSE 500 is up 15.75% CAGR 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.
The scheme does not sit in isolation. In November 2020, IDFC Mutual Fund sought rollover or extension of its close-ended fund called IDFC Equity Opportunity Fund Series 4 launched in December 2017. The scheme had delivered -11.15% CAGR since its launch (around -30% cumulatively) as of 25 November 2020 compared to 5.48% on the S&P BSE 500. Another close-ended scheme Aditya Birla Sun Life Resurgent India Series 7 scheme launched in March 2018 is up just 0.74% compared to 16.32% on its benchmark.
A close-ended scheme is a mutual fund with defined dates of entry and maturity. However, these dates may not coincide with market cycles and at times the maturity dates can come up when the fund is showing gross underperformance.
On the debt side as well, the close-ended funds have faltered. Kotak Mahindra Asset Fund was forced to extend FMPs which had exposure to Essel Group companies in April 2019, an act that invited a fine from markets regulator Securities and Exchange Board of India (Sebi) last week.
The regulator also imposed a ban on FMP launches by Kotak Mahindra AMC for the next six months. Close-ended funds with a specific theme are particularly risky. In the context of Aditya Birla Sun Life Resurgent India Fund Series 7, A Balasubramanian, its CEO said, “It was a close ended fund with specific on rural theme. It is coming for maturity that is being merged with one of the open ended fund 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 and small cap segments relative to large-cap companies. A surge in their stock prices prompted some fund houses to stop inflows into their mid and small-cap schemes. For instance, the S&P BSE SmallCap 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 and another 8.44% in 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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