Friday, December 21, 2007

Playing the NFO game once again

MFs rush to launch multiple infrastructure funds with negligible differences

Can a mutual fund (MF) launch a new scheme with identical theme to an existing one? MFs say they can, provided one is open-ended and the other is closed-end. Despite its heavily-advertised and successfully existing open-ended UTI Infrastructure Fund (UIF), UTI MF has launched another infrastructure fund, UTI Infrastructure Advantage Fund – Series I (UIAF) that is closed-end, whose new fund offer (NFO) closes on 19th December.

Old wine in new bottle
Fund manager Sanjay Dongre told us that since UIAF is a closed-end scheme, it can invest significantly in mid-caps and remain invested, as closed-end funds do not see much redemption like open-ended ones. This is a frequently-used argument of MFs to launch closed-end schemes, but do closed-end funds deliver? UTI Equity Tax Savings Plan, an open-ended tax-savings fund but with a three-year lock-in, returned 39.5 per cent in the past three years underperforming the benchmark and category average by six and four percentage points, respectively. Additionally, it also underperformed the category average of open-ended diversified equity funds by eight percentage points.

Cashing in
As against 2.25 per cent entry load that open-ended funds charge, closed-end funds can spend more as they charge as much as six per cent as NFO expenses. To make matters worse, UIAF’s name suggests that it could well be a series of infrastructure funds.

Tata MF has jumped on the infrastructure bandwagon, too. Despite a successful existing infrastructure fund, it recently launched another infrastructure fund that would invest 65 per cent in Indian infrastructure equities and the rest abroad. And now it has filed a draft prospectus of yet another infrastructure fund; targeting emerging economies, including India.

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