Close-ended tax saving funds, which once used to be very popular, are fast becoming

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a rarity thanks to changing rules and investor preference. In the ongoing financial year, so far only one close-ended tax saving fund — ICICI Prudential RIGHT — has hit the market even though the tax-saving season is drawing to a close.

Ever since the Securities and Exchange Board of India (Sebi) allowed fund houses to keep their tax-saving funds open-ended – with investors allowed to enter the fund at any time, most fund houses preferred to go for open-ended fund because it saved them from the hassle of getting regulator’s approval every time they launched a new fund. Besides, marketing new funds are always tougher.

Close-ended funds have a maturity of 10-years after which investors would have to mandatorily redeem their investments. Like open-ended funds, these funds also have a three-year lock-in.

Today, the ratio of the number of open and close-ended funds is tilted towards the former, with only 13out of 49 tax-saving funds close-ended for subscription.

Experts said with most fund houses already having an open-ended fund and with Sebi showing its reluctance in giving approval to new funds that are similar to existing funds, many AMC have launched close-ended funds.

Uttam Agarwal, head, HNI division, Bajaj Capital, said with Sebi becoming stricter in giving approval to new funds that are similar to existing funds, some fund houses tried to launch close-ended tax-savings funds, with their close-end feature being the only differentiator from the existing open-ended funds.

Close-ended funds were earlier allowed to amortise their initial expenses for five years, during which the initial expenses would not have immediate bearing on the net asset value of the scheme. The initial expenses then used to be as high as 6 per cent, charged upfront from investors.

However, as Sebi did away with the amortistion of initial expenses in 2008, the only advantage close-ended funds had, was also done away with.

Aditya Agarwal, country head, Morning Star, a mutual fund tracker, said close-ended tax-saving funds lose their charm once amortisation of initial expenses was removed. “Although, fund houses continue to launch such funds because investors would remain invested in such funds for a longer time,” he added.

Often many fund houses launch close-ended funds on a particular theme to attract investors. For example, Tata Mutual Fund in March 2009, launched a 10-year maturity close-ended tax saving fund on the infrastructure theme.