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Interval Funds at Death’s Door?

These funds are closing down in the face of rising problems

An unending stream of problems are welling up for the mutual fund industry and the resultant face-off is harming, not just its old funds where hundreds of thousands of investors have put in their money, but is also denting its fund managers’ confidence and self-assurance to explore sound opportunities in the future that would lead to the launch of funds that are both innovative and unassailable, carrying value for investors across the spectrum of the investing world.

The limelight, or rather dark clouds, are now hovering over the so-called interval funds, and their future is likely to have a tremendous impact on the way the industry does business and creates tailor-made products.

As it is the industry is looking to revive itself after the body-blows it suffered in October 2008 when redemption pressure from investors brought many funds almost to the closure stage. The first product to be at the receiving end of the authorities’ wrath were the fixed maturity plans (FMPs). The Securities and Exchange Board of India, after the government saved these funds with a Rs 20,000 crore bailout plan, changed the rules to ensure that this kind of a situation does not arise again. It had thereby almost signed the death warrant of FMPs, but that did not happen due to a variety of causes.

(Check out: Inflated Tales of FMP Demise)

Since the begining of the current year, 16 interval funds have been closed down, while others have not been launched. A peek at their falling assets too gives a rather bleak picture as many more funds are in waiting to close down.

JM Quarterly Interval Fund 4 of JM Financial MF was closed down on May 20 this year. And the most recent casualty is Religare Q Interval Fund - Plan B, which got closed down on June 4.

The reason behind the winding up of these funds is the same. All are being axed by the SEBI Circular No. 10/22701/03, dated December 12, 2003. According to it, all funds are required to have a minimum of 20 investors and no single investor should account for more than 25 per cent of the corpus of a scheme.

(Check out: Interval Funds Hit Roadblock)

With their mortality under constant question, all these funds are withering away on their own, unwilling perhaps to cling on to life with their fate perhaps, already sealed. As a result, currently, there are 155 active, open-ended interval schemes (including different plans/options). The total assets managed under these schemes are Rs 2,034 crore (May 2009), which is a sharp fall of 94.31 per cent from Rs 35,745 crore in September 2008.

With no champion in sight to rush to the rescue, in a scenario as bleak as this, the likelihood of the industry being able to survive the constant glare of the limelight on products they have spent so much time, money and effort in popularizing, is perhaps, negligible. Once launched, funds acquire a life of their own to push the entire industry on a growth path that positively impacts the entire economy and therefore they should be kept alive or allowed to die on considerations that have to do with the market.

Otherwise, why give any product the go-ahead to launch only for it to be revoked later on? It is harmful for the Indian mutual fund industry to take one step forward and two steps back – as it is market forces have conspired against the industry, due to the recession, yet if it is attacked on two fronts, then it will suffer irreparable harm. However, the good thing is that, after the October crisis, the mutual fund industry has recovered enough to reach a new average assets under management (AUM) record at Rs 638,592 crore. It signals the strength that the industry still packs, given the difficult economic conditions it is working under. Most of all, these kind of situations will have an adverse effect on investors too, particularly as they will preclude the provision of enough options that suit their needs.

Therefore, hopefully, it is still too early to write an elegy for Interval Funds, just as was the case for FMPs.

Trailing Returns*
Duration  Interval Funds  NSE T-Bill Index
1 Month 0.42 0.41
3 Months 1.47 1.52
6 Months 3.93 3.08
1 Year 9.14 7.92
3 Years (annualised) 6.77 7.48
As on June 05, 2009.