Close-ended funds fall out of favour, witness steep reduction in AUM

Mutual fund assets in close-ended schemes have more than halved in the last one year as a spate of credit defaults in the debt market, lower returns and regulatory moves have made the schemes under this category less attractive for both investors and fund houses.

The total assets under management (AUM) of all close-ended mutual funds fell 58 per cent to ₹65,379 crore as of September 2021 from ₹1.56-lakh crore at the end of September 2020. The outstanding number of close-ended schemes fell from 749 to 379 during this period. Per latest Association of Mutual Funds of India (AMFI) data, the outstanding AUM further slipped to ₹64,161 crore with 363 schemes as of October 2021.

What are close-funded MFs

Close-ended mutual funds are those funds that have a fixed maturity term and are open for investing only during the launch period. Within this category, there are income / debt-oriented schemes, growth/ equity oriented schemes, and other schemes.

Fixed Maturity Plans (FMPs) under debt-oriented schemes and Equity Linked Savings Scheme (ELSS) under growth/equity-oriented schemes together account for over 80 per cent of total close-end assets.

Ravi Sarogi, Co-founder, Samasthiti Advisors, attributes the fall in investor’s risk appetite due to credit defaults and falling returns due to lower interest rates in the underlying debt instruments as some of the major reasons for waning investor interest.

Stress in credit market

“Between 2014-15 and 2018 up until the IL&FS credit event, interest rates were good and any FMPs loaded with AA and A-rated papers projecting good yields used to sell like hot cakes. But in the last two years, due to the stress in the credit market, FMPs have lost their sheen and there is no point in making FMPs of a very safe portfolio since these instruments are essentially a credit play,” Sarogi said.

“We are not seeing any rollovers. Earlier, when one FMPs used to mature immediately there used to be another FMP right there to roll the capital over into that. Now, we are not seeing that,” he added.

FMPs were in the news for all wrong reasons in recent times. Earlier this year, some mutual fund companies which had invested in debt papers of Zee (Essel) Group entities were forced to hold back payments due to delay in recovery from the Zee Group. Infact, the market regulator SEBI banned Kotak Mahindra Asset Management Company from launching any FMPs for six months for arbitrarily entering into a ‘standstill’ agreement with the promoters of Subhash Chandra-backed Essel Group.

While the total AUM outstanding of income / debt-oriented schemes fell from ₹1.27-lakh crore in September 2020 to ₹52,092 crore as of September 2021, the AUM of growth/equity-oriented schemes fell from ₹28,563 crore to ₹13,287 crore during this period.

Regulatory changes

Dhirendra Kumar, Founder and Chief Executive, Value Research, attributed some regulatory changes to the drastic decline in total assets of close-ended mutual funds.

In 2018, SEBI capped the expense ratio of close-ended funds besides clamping down of upfront commission payment, making them less lucrative for distributors. “SEBI reduced the expense ratio of closed-end funds by a little more than half because they felt that unlike open-ended funds, close-ended funds do not require as much servicing and management,” Kumar said.

During the launch of a scheme, mutual fund houses paid a large portion of the total commission as upfront commission to distributors in addition to a trail commission. The upfront commission was then amortized in the books of the AMCs and recovered from the scheme over its tenure.

“That is why people have stopped launching new funds and the old ones, as and when they are due for redemption, are closed,” Kumar added.

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