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Cut in the Initial Burden

The rules changed recently. Fund no longer can charge initial issue expense. Will it make new funds attractive now?

Now that the initial issue expenses have been removed, will it make new funds an attractive option to invest in?
-R Nair

The recent guidelines regarding the initial issue expenses is a positive move because it will prevent the likelihood of shifting the burden of expenses from one investor to another.

Till now, open-ended schemes could amortise the expenses and if a significant number of the investors of an NFO redeemed their units, the burden of the initial issue expenses on the remaining investors would increase tremendously. But with the new regulation, that will no longer be the case and the expenses will be rightfully borne by the person who is supposed to pay them.

Having said that the amendment has only fixed a problem. It has not given the new funds any significant advantage over old and well-established funds. The uncertainties surrounding the new funds will always remain. And therefore, old funds should still be given preference over the new ones. You should consider a new fund only if it has something actually different to offer, for example investment in a new asset class, or investment in new markets etc.

Moreover, even though open-ended funds have been prohibited from charging initial issue expenses, the close-ended funds can still charge them.

And interestingly, subsequent to the issuance of the notice of amendment on April 4, 2006, all the funds that have been launched so far have been closed-ended.

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