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“Close-Ended Fund Shining in Indian Mutual Fund Market” – An Insight*

CASELET, FINANCIAL MANAGEMENT
ET Cases - GSMC, 6 Pages

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“Close-Ended Fund Shining in Indian Mutual Fund Market” – An Insight

 

Since September 2008, money markets have witnessed very tight liquidity for various reasons. The primary reason was a complete freeze in developed country credit  markets and other reasons included advance tax outflows, forex intervention by RBI to support rupee, Government borrowing etc. The debt schemes of mutual  fundsinitially the liquid schemes and later fixed maturity plans have been facing extreme redemption pressures.

Close ended schemes are defined in Regulations as schemes in which the period of maturity is specified. In terms of current regulation re-purchase of units by Mutual Fund of a close ended scheme is allowed. Further, the current regulation also exempts close ended schemes from mandatory listing in case, interalia, the scheme provides for periodic re-purchase facility to all unit holders with restriction, if any, on the extent of such re-purchase or if the scheme opens for re-purchase within a period of 6 months from the closure of Subscription. 1

 



1 http://www.sebi.gov.in/boardmeetings/closeended.pdf

Teaching Note Preview

“Close-Ended Fund Shining in Indian Mutual Fund Market” – An Insight

 

Synopsis

The Indian Mutual Fund market is in the advent of “close-ended equity” funds, which is substantiated, such that, out of the 33 equity NFO’s in the market during  2014, 21 schemes are closed-ended funds, with lock-in periods. This raise in trend, brings into play, the rhetorical question; “do fund managers prefer  close-ended funds?” and if so, “why?”, Or “does the investor perception change towards openended equity fund”, Or “is the market climate and dynamics  more suitable for long term-plan than short-term plan”? Another evidence, shows that improved market sentiment helped mutual fund companies to pick up  shares worth to Rs. 6000 crore in August 2014, making it the highest monthly inflow in more than 6½ years. This case highlights (i) the fund manager’s ability in  managing Closedended / Opened-ended funds. In practice, Active fund manager’s performance depends on three combinations: strategic allocation of fund’s corpus,  selection of securities, and periodic market movements. (ii) The evaluation of the validity of the models used in closed-ended funds in Indian context. (iii) Need and utility function of debt-instruments in the closed-end funds. The return patterns of close-ended funds invested in ELSS is presented and is the scope of this case  study. This includes the regulators’ policy on Mutual Funds, causing a rippling effect on the close-ended mutual fund market. Also the Regulatory changes and  circumvention of regulations have been considered as the sources for financial innovation. Following this statement, do the advent of sudden increase in close-ended funds relate to regulatory changes and circumvention of regulations in India. To conclude there is no abnormal scenario was viewed in the closed end  funds only the number of fund has increase in 2014 for the period January to June 2014. The corpus used for the closed end funds are gradual and it is in the normal mode only. When compared to developing countries, the long term growth story of India is intact. When long term funds are developed, it reflects the  strength of the market condition and the various growth stories are in future.

Pedagogical Objectives

  • • To learn closed end fund as the fund which mobilize capital into MSME’s in India
  • • Scenario analysis on Closed End funds

 

Assignment Questions

  • I. Still Closed end fund is a puzzle on the discount and premium of NAV
  • II. What is relationship between corpus collected and the number of the funds Closed Ended funds
  • III. ..............

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Abstract

The Indian Mutual Fund market is in the advent of “close-ended equity” funds, which is substantiated, such that, out of the 33 equity NFO’s in the market during 2014, 21 schemes are closed-ended funds, with lock-in periods. This raise in trend, brings into play, the rhetorical question; “do fund managers prefer close-ended funds?” and if so, “why?”, Or “does the investor perception change towards open-ended equity fund”, Or “is the market climate and dynamics more suitable for long term-plan than short-term plan”? Another evidence, shows that improved market sentiment helped mutual fund companies to pick up shares worth to INR 6000 crore in August 2014, making it the highest monthly inflow in more than 6½ years. This case highlights (i) the fund manager’s ability in managing Closed-ended/Opened-ended funds. In practice, Active fund manager’s performance depends on three combinations: strategic allocation of fund’s corpus, selection of securities, and periodic market movements. (ii) the evaluation of the validity of the models used in closed-ended funds in Indian context. (iii) need and utility function of debt-instruments in the closed-end funds. The return patterns of close-ended funds invested in ELSS, is presented and is the scope of this case study. This includes the regulators’ policy on Mutual Funds, causing a rippling effect on the close-ended mutual fund market. Also the Regulatory changes and circumvention of regulations have been considered as the sources for financial innovation. Following this statement, do the advent of sudden increase in close-ended funds relate to regulatory changes and circumvention of regulations in India.



Pedagogical Objectives

  • The fund manager’s ability in managing Closed-ended/Opened-ended funds. In practice, Active fund manager’s performance depends on three combinations: strategic allocation of fund’s corpus, selection of securities, and periodic market movements
  • Scenario analysis of the closed fund flow and number of funds
  • Need and utility function of debt-instruments in the closed-end funds

Case Positioning and Setting

  • Trend on Fund corpus of closed ended funds
  • Scenario analysis
  • Number of schemes and its flow in the market
  • Factors related to new inflows into Closed Ended Funds

* GSMC 2014, IIM Raipur

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