Everything you need to know about investing in closed-ended mutual funds.
Mutual fund schemes can be classified into three types based on their structure - open-ended, closed-ended, and interval funds. What determines that classification is how often you can buy or sell units of the scheme. While the open-ended funds are very popular, closed-ended funds have slowly started gaining attention. In this article, we will explore what closed-ended funds are, their benefits, detriments, and who should invest in those.
Closed-ended funds are a type of mutual fund, whether an equity or debt fund, that have a specific number of units issued by the fund house at the time of launch. Once the NFO period ends, you can neither buy nor sell units of the fund. These funds are time-bound and sold in the stock exchange like shares, and have a fixed maturity period. The NAV of close-ended funds determine their actual price, and the traded price could be below or above the same, based on the demand/supply for the fund units.
There are several benefits of closed-ended mutual funds that might attract you as an investor:
Since redemptions cannot be made by investors until maturity, the fund manager holds a fixed asset base. This stability will allow them to hold long-term investment strategies without fear of sudden redemptions, hence giving them the freedom to meet the investment objectives of the fund.
The units of a closed-ended fund are traded in the stock exchange. Prices are therefore determined by the forces of demand and supply. In this case, if the demand for a particular closed-ended scheme is higher, the traded price may be higher than the NAV of that fund. You are, therefore, bound to benefit from the fluctuations in prices.
While you cannot redeem units directly through the fund house, closed-ended funds are not entirely illiquid. You could buy or sell your units on the stock exchange, making them relatively accessible compared to what their 'closed' structure might suggest.
Closed-ended funds have some disadvantages too:
Although fund managers have enough opportunity to create a good investment strategy, closed-ended funds have not had consistent performances in the past as compared to open-ended ones.
Unlike open-ended funds, you cannot invest with SIPs in case of the closed-ended funds. All investment has to be made as one lump sum in the NFO period.
Closed-ended funds depend a great deal on the capabilities and choices of the fund manager. Your investment will have much to do with how successful the fund manager is in navigating the market.
Closed-ended funds may not be the best choice for everyone since they do not come with a redemption option until maturity. If you are an investor with an investible corpus, and the maturity date of a close-ended fund is in sync with your investment goals, you may invest in the scheme.
Closed-ended mutual funds offer unique advantages. However, they have their limitations. You can invest in these funds directly through an asset management company (AMC) or with the assistance of agents and distributors. Alternatively, you can buy a closed-ended fund online, directly through the website of a mutual fund company. Remember your financial goals, investment horizon, and risk appetite before investing.
While looking at close-ended funds, consider checking the Bajaj Finance Mutual Fund Platform to take a look at over 1,000 mutual funds. Here, you can access a mutual fund calculator that you may use to compare mutual funds and make a decision before you start investing in mutual funds.
No, you cannot withdraw your units directly from the fund house before maturity. You can sell them on the stock exchange at the prevailing market price.
Closed-ended funds cannot be said to be riskier since their returns are substantially dependent upon the expertise of the fund manager. The inflexibility in redeeming units and requirement for a lump-sum investment might increase the level of perceived risk.
No, you can't switch directly from a closed-ended fund to an open-ended fund. You can, however, sell your units on the stock exchange and invest the proceeds in an open-ended scheme.
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