VR Logo

The Enigma of Closed-end Schemes

Compared to similar open-ended schemes, the performance of closed end-schemes hasn't been as good as expected

Closed or open-ended? The argument goes on, but going by the performance, not to mention the convenience; open-ended win hands down. We checked the performance of closed- and open-ended funds with the same investment objective and from the same AMC for the same time period: clearly performance swings in favour of open-ended schemes.

What set us up was the launch of IDFC Equity Opportunity - Series 1, a closed ended equity fund, launched in April 2013. This scheme set the tone for 20 launches since then, accounting for 31 per cent of the total equity NFO mobilisation in FY14 as compared to only 5 per cent in FY13. But the returns of these funds do not justify this enthusiasm (See: Open-ended scores more). Take for instance, ICICI Prudential Value fund Series 2 generated a return of 32.60 per cent as compared to the 38.48 per cent generated by ICICI Prudential Value Discovery from Dec 6, 2013 to May 26,2014. Likewise, Sundaram Select Micro Cap - Series 3 trailed Sundaram S.M.I.L.E by 14.25 per cent in the last three months.

In fact, only four closed end funds out of the 28 cases analysed (including RGESS schemes) have outperformed the open ended schemes by over 4 per cent and the sole outlier is IDFC Equity Opportunity fund - Series 1 which has outperformed by 18 per cent. The argument by AMCs that closed-end schemes allow fund managers to invest without the worry of redemptions, is simply not reflected in the performance. Moreover, closed-ended funds have the inherent limitation of investing at the time of NFO and exiting at the time of maturity.

What more, unlike open-ended funds where investors can reduce the investment risk with SIPs, these funds do not have such an option. Most of the recent launches have been in the mid and small cap space which further adds to the risk of investing in these schemes.

We have always stated the need to invest systematically in equity funds and not be carried away by themes or timing one's investments. The lesson: stick to open ended funds, resist the hype, diversify and invest regularly.