The Hindu Business Line : Close-ended equity funds may give rise to new wave of NFOs

Close-ended equity funds are likely to give rise to the next wave of new fund offers (NFOs), if suggestions made by asset management companies are any indication.

One offer document after another has been filed with the Securities and Exchange Board of India in the recent past, each relating to a fund that will typically stay close-ended for 18 to 36 months, only to be converted into an open-ended structure at the end of this period.

Five-year products, though uncommon, have also been mooted. Among the fund houses that have devised close-ended products are HDFC MF, Tata MF and SBI MF. The schemes in question are Tata Rural India Fund, HDFC Prudence Dynamic Fund and SBI One India Fund.

MF sources say that close-ended products will now start coming in greater numbers, a concept that has to be accepted by clients who have lately seen open-ended, diversified equity funds do well in terms of outperforming their benchmarks.

The reference is clearly to schemes that have turned in decent performance during the bull run enjoyed by the Indian stock market till early May.

NFOs: Quiet Scene

While these schemes may not exactly flood the market, chances are that these will lead to the next round of NFOs, it is felt.

Also, some more offer documents are expected to be filed with the regulator in the near future. It may be mentioned here that the NFO scenario, which was humming with activity till about end-April and even early-May, is now quiet.

No new equity fund is on offer at the moment — even though fixed maturity plans (FMPs) are showing some signs of activity.

The close-ended schemes that have been worked out have certain common characteristics. A typical scheme, with its focus on equity and equity-related instruments, will try to provide capital appreciation to unit holders. Exits during the close-end period will not be easy, given the fact that relatively high loads will be charged if an investor wishes to move out early on. The loads will be scaled down progressively.

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