The market regulator SEBI (Securities and Exchange Board of India) is rightly concerned about the mushrooming New Fund Offers (NFOs) by mutual fund houses in India which have been receiving enthusiastic response from small investors harbouring under the wrong impression that they are on a par with Initial Public Offers (IPOs) issued at par and, hence, must be lapped up.

It has vowed to disabuse this wrong notion through an education campaign.

An NFO is different from an IPO the latter is a known quantity, if one may say so, being an offer by a company that has bared its chest, whereas the former is an unknown quantity about to start its venture with a clean slate by investing the funds thus mobilised in the shares and other permitted investment avenues.

An NFO simply cannot be made at a premium, whereas an IPO invariably is made at a premium; deservingly or otherwise is of course a subject matter of another debate.

A close-ended fund has no choice but to start a new scheme to accommodate heightened interests shown by the investors in its schemes.

An NFO thus has to follow as a corollary. But why should a fund already having an open-ended scheme of a particular variety, say, a growth scheme, come out with another open-ended growth scheme given the fact that in such a scheme entry and exit are allowed freely and indefinitely based on Net Asset Value (NAV).

There is no reason why SEBI cannot confine and tie down an Asset Management Company (AMC) to just one scheme of open-ended variety for a particular investment mix. The logic for multiple schemes apparently would be to provide an alternative platform to investors if the existing scheme is not doing as well as the competition.

People in the know however have it that this is just a fig leaf for a more sinister design appropriating 6 per cent of the collections from NFOs towards administrative expenses.

Be that as it may, the fact is multiple open-ended schemes puts a question mark on the very concept of open-ended funds, with discerning observers seeing in it a tacit admission of poor choice of investments in the past that the fund is finding difficult to shake off.

Trying to insulate the new entrants from the bitter harvest of past mistakes is of course a noble intent but then a portfolio of schemes is the hallmark of a close-ended fund.

A fund not having the confidence to run open-ended schemes without pangs of guilt necessitating repeated floating of new schemes should confine itself to close-ended schemes.

Easy entry and untrammelled exit endears one to open-ended schemes given the fact that exit from a close-ended scheme is possible only at a discount with reference to NAV with the size of the discount tapering off as the scheme progresses towards maturity.

Clarity on the duration of the scheme, ban on late entrants and lack of redemption pressure that often is the bane of the open-ended fund are factors in favour of close-ended schemes, especially when one is prepared to stay the course. Policymakers should give all encouragement to close-ended schemes then.