Close-ended equity plans may have come to the end of the road;

Close-ended equity schemes of mutual funds, in which investors’ money is locked in for a specified period, may get a quiet burial. The Securities and Exchange Board of India will not give mutual funds the approval to launch regular close-ended equity schemes as it fears these products have been mis-sold to investors, said three people close to the development

Mutual funds operate products under two broad categories: close-ended and open-ended schemes. In close-ended schemes, the money cannot be redeemed until the tenure is over. Open ended schemes are flexible; investors can redeem at will.

Since 2013, 172 close-ended equity schemes have raised close to ₹39,000 crore. Out of this, about ₹32,000 crore is still locked in across 125 schemes.

Sebi spoke of its reservations about equity close-ended schemes in a recent meeting by the Mutual Fund Advisory Committee, a panel for industry reforms. Top regulatory officials told the committee members that close-ended equity schemes had no advantage for the investor compared to open-ended schemes. Fixed Maturity Plans, a closeended debt product, and Capital Protection schemes will continue to get approvals. An email query to Sebi on the issue went unanswered till the time of going to print.

Mutual funds are under lesser pressure to deliver consistent returns in equity close-ended schemes compared to the open-ended ones because investors usually do not redeem mid-way through the tenure of the fund in the event of underperformance. Although investors can sell their units on the stock exchange — where close-ended products are listed — most of them end up holding the product until maturity. In open-ended schemes, fund managers are under constant pressure to deliver, failing which investors would pull their money out of the product.

 

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