Mutual fund (MF) figures released by the Association of Mutual Funds of India (AMFI) indicates that close-ended schemes are losing their sheen as investors are showing increasing preference for open-ended schemes.

Close-ended schemes posted net inflows of Rs 32.3 bn in 1999 (calendar year), as compared to net inflows of Rs 128.2 bn aggregated by open-ended schemes. Equity-linked schemes (ELSS) (being close-ended) have witnessed net outflows of Rs 4.7 bn in 1999. The trend continues even in the year 2000, as net outflows in January touched Rs 220 m.

However, assured income and plain vanilla income schemes, despite being close-ended, continue to find favour with investors. Investors have subscribed to these schemes in large numbers given the nature of returns and stability that they offer to the investors.

Increasing preference for open-ended schemes is an indication that investors want to invest in schemes that give them an opportunity to exit. The exit option allows investors to take advantage of the rise in NAVs (net asset value) and sell to maximise capital appreciation. With the explosive rise in software stocks over the past few months, investors want to exit open-ended schemes to exploit capital appreciation opportunities. Close-ended schemes do not offer investors this opportunity. That is one reason why a lot of close-ended ELSS schemes have gone open once this was permitted.

Moreover, with a higher effective dividend tax of 22% on debt (income) schemes (proposed in the latest budget), investors are unlikely to invest in income schemes in a big way. In fact, they may well exit from these schemes and migrate to the more attractive equity (growth) schemes.

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