HDFC has a New Fund Offer (NFO) ongoing for it’s Mid-cap opportunities fund. This is a 3 year closed ended fund that invests in midcap companies, and will convert to an open ended scheme after three years.
They have sent me a flyer giving some basic information about the fund. Among this was their own answer to a question:
Why Close-Ended Fund?
- Mid and Small-Cap companies may take time to mature, therefore there is a need to remain invested for a longer period of time.
- Flexibility to develop core portfolio with longer time horizon to reap full benefits of investments as there is no pressure to invest/divest in a hurry.
- Helps take advantage of volatility.
Very noble gesture, but sorry, I don’t believe any of this. A Closed ended fund is named wrongly, as I had noted. The concept behind closed ended funds is not the fact that you are locked in for three years; you are not. What happens is that FRESH investments are not possible post the NFO, until the end of the closed ended period, in this case three years.
Closed ended funds can allow early redemptions – in fact this HDFC scheme allows redemptions too, on the 15th day after the beginning of each calendar quarter. That makes it possible for you to redeem your money, although only at specific intervals. But you can NOT put more money into the fund post NFO! That’s not closed ended, that’s a closed entry fund.
If they really wanted to achieve their noble goal they could have structured it like an ELSS fund – locked in for three years (no redemptions possible at all), and remained open ended to allow more subscriptions later.
What happens if a new IPO comes up that is for a good midcap company? Or if a company that was previously loss making suddenly starts to show promise? This fund cannot invest in such companies at a later date, because it would have deployed most of its funds into investments, and by principle it wants to allow a long time per investment. And it cannot gather more money because the closed ended funda means no more money is allowed in!
If the fund wants to buy and hold for a long time, it must allow fresh investments to allow for new opportunities to be tapped. And the closed ended concept denies it that liberty.
Let me tell you my opinion on why this fund is closed ended. It’s because closed ended NFOs get to charge 6% as “initial expenses for NFO”. This is not available to open ended NFOs. The closed ended funda is to compensate distributors and the AMC through higher upfront commissions. With your money. For every Rs. 100 you put in, only Rs. 94 is invested – the remaining Rs. 6 is charged to you over the three year closed period through adjusting the NAV daily. (This is legally allowed)
What you need to know is that you get charged this 6% amortised over three years. If you want to exit early (on the 15th day of a quarter) you get charged any unamortised costs.
For the record, I would not recommend this (or any closed ended) NFO. Stay away from them. If you want to buy mid-cap funds, buy open ended funds like SBI Magnum Global or Reliance Growth.
Note: I was not able to connect to the HDFC mutual fund website so I can’t link directly to the fund offer document.
