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Want to Invest in Close-ended Mutual Funds? Make Sure You Know This Research Team | Posted On Wednesday, December 18,2019, 05:39 PM

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Want to Invest in Close-ended Mutual Funds? Make Sure You Know This



Taking advantage of the investment market, the fund houses have come up with sizable new closes-ended schemes to lure investors. As per the reports of the AMFI, fund houses have introduced 12 new closes ended equity scheme during the final quarter of 2018. Consequently, the investors are eager to try out their luck with investments in close-ended schemes.

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Want to Invest in Close-ended Mutual Funds? Make Sure You Know This

If you too are interested in such investments then here are a few things you need to know before arriving at any such investment decisions:

Lack of Past Records and Real-Time Comparison:

In an open-ended mutual fund scheme investors can make informed investment decisions by accessing the past performance of the funds over various market cycles. When it comes to close-ended mutual fund schemes investors have to depend upon the expertise of the fund manager. This is because a close-ended mutual fund scheme do not have any track record. They are mostly launched with the NFOs and they are not available to an investor post their initial offer period, so most rating agencies do not consider rating them. The lack of track record implies that investors cannot compare the past performance of such schemes through market cycles or compare it with peer schemes.

See Also: How Mutual Funds Work?

Concentrated portfolio and High Expense Ratio:

These funds are known to invest in small-sized portfolios which consist of only a few stocks. Thus it usually takes concentrated portfolio bets which turns to be risky for investors. This also leads to a higher expense ratio as well. Although the funds are regulated and maintained by SEBI and the amount investors has to pay as expense ratio has been capped, close-ended funds still maintain the highest expense ratio due to the small size of the funds. The charges can only be decreased only if additional stocks are included in the portfolio.

Low Liquidity:

As we already know, closes ended schemes come with a lock-in period. This means investors cannot exit the funds when a financial emergency arises. Thus, unlike an open-ended scheme, these schemes are not liquid as the units cannot be redeemed or sold when the need arises. These funds are not suitable for investors who need interim funds during the investment tenure. Investors also cannot exit funds due to the underperformance of the portfolio.

However, investors have the option to sell their scheme on the stock exchange through the DEMAT format. Investors interested in investing in close-ended funds may buy your units when traded in the stock exchange.

See Also: Which Type of Mutual Fund Is Best to Invest?

Absence of SIP Investment Option:

Most of the retail investors want to invest limited money in stock market assets due to the risk-factor it contains. However, the SIP mode of investment helped retail investors contribute a sum regularly thus easing their financial burden.

Lack of SIP mode of investment in close-ended schemes pushes maximum investors towards open-ended investment schemes. Additionally, investors need to invest a lump sum amount in such funds since close-ended schemes do not offer the flexibility of regular investments.

Also, due to the lack of rupee cost averaging on closed-ended schemes, it may not affect the fund even if the market falls. The performance of the fund is solely dependent on the timing of the fund. To gain maximum returns and reduce the risk the fund managers must perfectly time the date of opening and date of closing of the funds.

Benefits of Investing in Close-ended Mutual Funds:

Investors Do Not Panic:

Close-ended mutual funds come with a specific maturity term. Investors aiming to build a sizeable corpus without worrying about the regular market fluctuations can invest in such schemes. Investors investing in these schemes cannot exit whenever they want. This is the reason such schemes give fund managers a more stable asset base to manage the fund throughout its term. Fund managers here; do not have to deal with the uncertainty of redemption.

The returns from such funds are not affected by share market fluctuations, rather the opening date and the closing date determines the number of returns the investor is likely to earn.

See Also: Questions to Ask Before Investing in Mutual Funds

Invest in Funds That Offer Differentiated Income:

Unlike open-ended market scheme, investors now have the benefit of investing in funds that offer differentiated income or objectives. In this respect, close-ended schemes can be unique as they need a specific period and thus they must be properly timed. This strategy can be used by select investors who are willing to invest in a different risk profile and make investments accordingly.

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