The pressure of redemptions, i.e. investors exiting from the fund, has given nightmares to many a seasoned fund manager. Open-ended mutual funds, which by definition allow investors to exit at any point, are run by fund managers who keep higher levels of cash aside for redemptions.
But being prepared for the worst scenario could have ‘helped’ openended mutual funds which have outperformed their closed-ended peers in the last 12 months, an analysis shows.
While top close-ended equity diversified funds have grossed (-) 44% in the one year, their top open-ended peers have given (-) 33% in the same time. As an investor, this means 10% of your money was saved if you chose an open-ended scheme. Both types of funds being ‘diversified’ meant they chose wide variety of stocks to hedge their risks but still a wide gap persists.
“One reason could be the optimal design for open funds,’’ Prateek Agrawal, head of equity at Bharti AXA Investment Managers, said. “Open-ended funds have to be prepared for both inflows and outflows.’’
Mutual fund industry analysts point out that fund managers in open-ended schemes keep 15-20% of assets in cash and cash related instruments to meet redemptions. Top open-ended funds such as Birla Sun Life Dividend Yield Plus, UTI Dividend Yield, IDFC Imperial Equity, DSP BlackRock Top 100 Equity and UTI Contra could have scored on this point.
Putting beside more cash left less room for open funds to remain less invested in themes such as mid-caps and smallcaps, which meant that they (open funds) were stuck with less illiquid stocks.
“A good number of fund houses zeroed in on the close-end structure to invest in small and mid-cap themes or infrastructure/construction stocks. These stocks were known to hold long term potential but were also among the most illiquid stocks,’’ said a fund manager of a closed-ended scheme.
Top closed-ended funds such as Tata Equity Management, UTI India Lifestyle, Fortis Sustainable Development, Sundaram BNP Paribas Equity Multiplier and LIC MF Top 100 were perhaps exposed to some illiquid stocks. Once trading volume thins, illiquid stocks are the ones more difficult to dispose off.
Dhirendra Kumar, CEO of fund tracking company Value Research, feels fund management for close-ended funds has been less intensive in the past one year.
“Most close-ended funds used to charge initial launch expenses of a new fund offer till 2007. This was stopped from January 1, 2008. Would fund management companies be interested at a similar level then? Launches of new close-ended funds have been minimal since then and existing funds were less-intensely managed,’’ Kumar said.
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