Fools rush in where angels fear to tread

The past couple of days have seen three fund houses launching three-year close-ended diversified equity funds. SBI Mutual Fund, Reliance Mutual Fund and LIC Mutual Fund are the latest to join the close-ended fund bandwagon. While I wrote about it earlier about the mad rush, I want to keep singing about this organised, massive and institutionalised misselling.

Fools rush in where angels fear to tread!

While all three funds carry fancy names, how different these are from the existing bouquet of funds by the abovementioned houses remains to be seen. With benchmark indices at stratospheric levels, it appears that fund houses cannot seem to resist the short-term favourable climate for mobilising fresh assets from retail investors.

At the end of ’05, there was only one close-ended growth scheme. So far in ’06, already 10 close-ended growth schemes (excluding the abovementioned schemes) have hit the market. More are in the pipeline for regulatory approval.

Sebi issued a circular in April, 2006 that said open-ended schemes would have to charge the initial expenses in the entry load of the scheme itself or should be paid by the asset manager. Earlier, funds could charge up to 6% of funds collected in a new fund offer (NFO) as expenses.

Off the record, asset management company (AMC) officials agree that the regulation, allowing close-ended schemes to amortise expenses over the life of the plans, is the primary reason why there is a spurt in NFOs of close-ended schemes.

Market watchers also allege that close-ended schemes, which are variants of their existing open-ended products, help fund houses skirt the Sebi diktat to trustees of AMCs to certify that a new scheme being launched is not similar to any of the company’s existing ones.

Open ended funds also provide a history of performance which is not available in the NFO.

Clearly one should avoid these NFOs which is misselling institutionalised!