Korea's asset management companies and investment trust companies are set to fight for the mutual fund market later this month following the government's approval of semi-open funds last week. Investors' response to the new products will be key to how fast the Korean unit investment trust industry reforms: the more popular semi-open funds are, the less likely the government will quicken the wholescale unit trust reform process.

The new rules will allow Korean investors to invest in semi-open mutual funds. This means investors can redeem up to 50% of their funds after three months of investing, and 100% after six. Asset management companies (AMCs) and investment trust companies (ITCs), on the other hand, are permitted to accept new money throughout the life of their funds so that they will not be placed in a situation where the level of money in the funds become too low to be viable. In the past, AMCs were only allowed to offer closed-end funds and ITCs are confined to offering unit investment trusts. Open-end funds are not permitted in Korea.

The Financial Service Commission (FSC), the country's securities watchdog, has told FinanceAsia.com that it will review the timetable of introducing open-end mutual funds depending on how the semi-open fund initiative "settles down" with investors.

Hong-Seog Oh, FSC assistant manager in charge of the mutual fund industry, says the performance of ITCs in the next few months will also impact the progress towards full open-end fund reform.

ITCs are currently the recipients of every support the government can dish out to make them stay alive. The fear is that a fully-open fund market may cause too rapid a shift of investment from ITCs to mutual funds, weakening the shaky ITCs industry further. Hence the introduction of semi-open funds as a preliminary test for investors' reactions. Investors prefer mutual funds to ITCs products because they perceive the mutual fund industry to be more transparent with their fund administration process.

Oh expects the 31 AMCs and 23 ITCs to start offering semi-open funds in the next few weeks. He says existing closed-end funds can be converted into semi-open end funds if the AMCs wish to do so. The size of the closed-end fund market is estimated to be between W6 trillion and W7 trillion ($5.38 billion and $6.28 billion).