Financial Times

Close-ended mutual funds to be introduced soon
By Duruthu Edirimuni
The Securities and Exchange Commission (SEC) is expecting to approve several applications for close-ended mutual funds before the year-end, in a bid to introduce new products to the market, a move market analysts said would ensure guaranteed returns to investors.

"We are moving towards new product development and close-ended mutual funds are one of those, which will offer a different risk reward to the investors," SEC Director General, Channa de Silva told The Sunday Times FT. This has come on the back of the Unit Trust Code of the SEC incorporating close-ended mutual funds, through a gazette notification issued in February last year.

"Investors usually want guaranteed returns with open-ended funds, which we are unable to do, but with closed-funds it is possible," Namal Kamalgoda, Chief Investment Officer, Eagle NDB Fund Management Company Ltd., said. Close-ended or closed mutual funds are financial securities that are traded on the stock market, similar to a company issuing a fixed number of shares in an initial public offering.

A mutual fund or an investment company will raise funds through a process commonly known as underwriting to create a fund with specific investment objectives. The regulator has received several applications from investment companies so far. "We have got some applications and we are going through them," De Silva said, adding that some will be listed on the stock exchange, and others will trade as normal unit trusts.

"If the close-ended funds are traded on the exchange, as exchange traded funds, they will be traded based on their net asset value (NAVs)," Prabodha Samarasekera, Fund Manager at NAMAL said.

"The main difference between the open-ended and closed funds is that the former attracts new investors on an ongoing basis, but the latter specifies a stipulated time period, where investors can invest and redeem their funds," De Silva said.

Analysts said that the best feature of closed-end funds is that investors get professional investment management and often a diversified portfolio of high quality stocks, sometimes at a discount. "One advantage of close-ended funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks, with the ability to buy at a discount," Rachini Rajapakse, Senior Fund Manager, Ceybank Unit Trust said.

The discount is the difference between the market price of the closed-end fund and the value of the stocks in its portfolio. The value in the stock portfolio is the NAV. Rajapakse said that the returns for both open-ended and closed-end funds depend on the underlying assets that the funds have invested in.

As opposed to open-ended funds, the closed-funds have a stipulated maturity period, ranging from two to 15 years. "In open-ended funds, investors can redeem their money at any time and the size of the fund will keep fluctuating, whereas the closed funds will have limited options of redeeming till the fund is liquidated," Rajapakse said.

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