Close-ended mutual fund schemes see a sharp rise

With a fourfold increase in new launches, FMPs emerge the favourite.

Amid volatility in equity markets and consistent redemption, the number of close-ended schemes in the mutual fund industry saw a sharp rise in the last financial year, courtesy fixed maturity plans (FMPs). Fund houses registered a four-fold rise in the number of FMPs in 2010-11.

According to data from the Association of Mutual Funds in India (Amfi), the number of close-ended schemes reached 368, as against 202 last year, a jump of over 82 per cent. In contrast, the number of open-ended schemes could grow by 13 per cent only.

majority of the rise happened in the income category. The number of schemes more than doubled, registering growth of 134 per cent. “It is mainly on the back of the industry’s emerging favouritism for FMPs,” said an independent observer of the fund industry.

Says the chief investment officer of a medium-sized fund house, “There is no point investing in equities if you can earn similar, or even better, returns by investing in debt funds.”

With 456 schemes, the year surpassed the number of FMP launches in 2008-09, when the industry came out with 448 such products. Interestingly, after the October 2008 collapse of FMPs, the industry launched fewer FMPs in the succeeding year, mobilising a meager sum of Rs 24,026 crore, as against Rs 100 lakh crore in 2008-09.

However, according to data sourced from Morningstar India, a firm tracking the Indian fund market, fund houses mobilised Rs 1,13,416 crore through FMPs in 2010-11, well above the amount raised in 2008-09.

Dhruva Chatterji, research analyst at Morningstar, says, “In a rising interest environment, FMPs are the preferred investment option for debt investors. Further, high short-term interest rates add to their attractiveness as they are able to give higher yields.”

Generally, fund houses prefer the second half of a financial year for launching FMPs as investors can get double indexation benefits. Indexation benefits help lower the capital gains, thus lowering the tax outflow. In certain scenarios, by staying invested for a little more than a year and covering two financial years, the investor is able to get inflation indexation benefit for two financial years.

This was true for 2010-11 as well. Of the total FMPs launched, over three-thirds came in the second half, post September. With 134 launches, March recorded the maximum FMP launches in a single month ever, garnering assets worth Rs 28,000 crore.

Source: http://www.business-standard.com/india/news/close-ended-mutual-fund-schemes-seesharp-rise/433856/