SBI Mutual Fund has launched SBI Equity Opportunities Fund -Series II scheme. It’s from the category of closed ended mutual funds. With performance of equity markets this category has gained importance among mutual funds houses. Many closed ended schemes have been launched and many will be in the forthcoming list. But why such an interest and does a closed ended fund like SBI Equity Opportunities Fund Series II really beneficial for investors.
To understand the product we need to understand the category first. Let see how closed ended mutual funds are structured and what are there pros and cons viz a viz open ended mutual funds schemes.
Closed Ended Funds
As the name suggests closed ended funds have a fixed term i.e. the investment is fixed for tenure. So you may have a term of 1 year, 2 year, 3 year or even a 5 year closed ended mutual fund scheme. Within this time frame you cannot invest or redeem from the scheme. This is unlike open ended mutual fund where you can invest and redeem at any given time and there is no fixed tenure. The time you stay invested becomes the tenure of the fund for you. A closed ended fund being a closed ended in nature has many restrictions and differentiation from open funded funds. Firstly you cannot invest in this scheme once NFO is closed. The investment option in a closed ended fund is available only during NFO. Secondly you cannot withdraw your investment through mutual funds house. These schemes get listed on stock exchanges. If you wish to liquidate you can sell through exchange for which other factors come into play. Lastly, once the tenure expires the scheme can become open ended or you may get the redemption amount. The option is given by AMC to all the investors. This is the basic structure of how a closed ended fund works.
A close ended structure has many drawbacks when you compare it to open ended schemes.
- Lower Liquidity– Since it’s a closed ended fund there is no liquidity within the tenure from mutual funds houses. If you want to liquidate your money then you have to do it through stock exchange where they get listed. Now this liquidity will depend on the demand supply which has been very low until now. This is not favorable if you as an investor wish to exit due to profit booking or even the under performance.
- No SIP– In a closed ended fund there is no SIP option available to you. This is a big setback since you do not want to expose in equity market at one go. Also, as a salaried, a SIP favors you the most considering you have other commitments going. Absence of this option is a huge deterrent for small investors like you and me. Even in lump sum investment the advisable route is to stagger the investment at different time period. Close ended mutual funds scheme fails to meet either of these objectives.
- Concentrated Exposure: As compared to open ended funds which have a high diversification of 40-50 stocks closed ended funds can be concentrated to 20-25 stocks. It can be considered as an opportunity to generate higher returns but can be on high risk category which you may not like.
AMCs launching these funds give long term investing as the best benefit of closed ended mutual funds scheme. Since its long term money even the fund manager invest for the long term. But through SIP I can always create that discipline and even if I would like to lock in my money to give fund manager the relief of not worrying about early withdrawals then why not ELSS?. Looks like the benefit is more for AMCs.
SBI Equity Opportunities Fund-Series II
SBI has launched this fund in the height of equity markets rise. This fund is of closed nature with features highlighted above. Additionally the fund will invest 80-100% in equity markets and can go from 0 to 20% in debt and money market instruments. Predominantly these debt and money market instruments maturity will be in line with the tenure of the scheme i.e. 3 years. The fund will get listed on BSE Ltd post the close of NFO from where further investment or redemptions can be pursued.
Why I Don’t Like Them?
First of all I always hate launching same type of funds in series. It becomes a mere collection of money for the fund house to capture the interest of investors. So if the same fund with same objective was launched in 2013 then the same scheme in 2014 is not an opportunity for investors but for AMCs. Won’t the same fund launched previously will do well ? If I have to invest only for 3 years why not have ELSS which has same tenure with a compulsorily lock in. I would have a greater discipline of buy and hold strategy in such scheme.
Investing in existing mutual funds with good track records is always advisable. When there are funds with same objective available getting into NFO may be just a self-relief of investing at R 10 else I don’t see any benefit. An existing fund has a track record of scheme and the fund manager. Investors who are investing through SIP for last few years would be seeing the benefit. Any kind of lock in is a force discipline and to me it is a bad proposition. Discipline should be inculcated by self so that you can be disciplined not only in investing but in other money matters too. Rests if you keen to invest consider that the money should not be required for next three years. But look at your existing investment portfolio and existing schemes with same objective. You may find a better opportunity and avoid duplicating funds.
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