What is close-ended mutual fund? Difference between open-ended and close-ended funds.

What is close-ended mutual fund?

Close-ended Mutual Funds raise capital through an NFO (full form of NPO is a new fund offer) to invest for a fixed period of time. These are good for investors who can invest in a lump sum manner because the SIP option is not available.

Also, the closed-ended funds are traded on stock exchanges, so the value of a unit may go above or below the value of the portfolio at a point in time, so an investor can take advantage of the same

1. Stability to fund manager.

Investments in the fund are fixed & the fund manager doesn’t have to worry about the liquidity and the outflows from the fund.

He can invest freely without thinking about the liquidity levels which is required when the investors wants to quit the scheme this may enhance the portfolio returns of a closed-ended fund.

2. No SIP, only lumpsum investment option

In a close-ended scheme, a mutual fund house raises capital for a fixed period of time these funds are traded on the stock exchanges, just like a stock and an investor can withdraw money by selling the units. 

But SIP  i.e. systematic investment plan is not available in the case of close-ended schemes, it is a significant disadvantage as compared to an open-ended fund because usually, an average individual investor doesn’t have a large chunk of money to invest at a particular point in time.

3. Non-availability of track record

The close-ended scheme is a new fund that is newly launched by a mutual fund house, so there is no past record of the investing style and the performance of the fund available, so it is very difficult to guess how the fund will perform in the long run but the fund manager’s past performance from other schemes can be looked out for.

But the investment philosophy in a new scheme may be different from the older or the other scheme which the fund manager has already managed.

4. Not a great performer in the past

Evidence doesn’t suggest that it can perform better than an open-ended fund so it may be wise to invest in an open-ended fund over a longer duration of time by doing a regular SIP instead of investing a lump sum amount in a closed-ended mutual fund. 

Also, there is not much incentive to the fund manager if he beats the market because when if in case of an open-ended scheme if he beats the market he may get more funds over a period of time.

But in the case of a closed-ended mutual fund after the fixed period has matured the investor takes their money and goes away.

5. Depends on when the funds start.

As the CEO of valueresearch.com, Dhirendra Kumar says “the return of closed-ended funds depend on when the mutual fund scheme has started”

This means that if a close-ended mutual fund scheme has started in a bear market the returns in a corresponding bull market will be higher as compared to other funds and vice versa. So the timing of a close-ended scheme is very important.

What is close ended funds?

6. Who should invest in a close-ended fund?

A salaried person should not invest in a closed-ended mutual fund, he is better off investing in an open-ended mutual fund. 

But in case if a person wants to invest should have a large chunk of money available. This money may be available because he would have sold his business or other related things.

But in general, a mutual fund investor is better of totally avoiding a closed-ended mutual fund scheme.

7. Withdrawal options in a close-ended fund

An investor in a closed and can withdraw his money at any time as the units of closed-ended funds are traded on the stock exchanges just like ETF or stock, but the liquidity may be lower as compared to an open-ended scheme.

So to answer the question can an investor in a closed-ended fund withdraw his money anytime?  The answer is Yes.

8. Difference between open-ended and close-ended funds

Points of Difference Open-ended fund Close-ended fund
Liquidity More Liquid as compare to a close-ended fund. Less liquid as compared to open-ended.
Past performance Past performance is available Past returns are not available.
SIP SIP option available. Only the lumpsum option available.

Learn about equity mutual fund taxation here.

Related Topic: What is a small-cap mutual fund?

Disclaimer

I am not a SEBI registered investment advisor. This article is for information purposes any scheme or company name mentioned here is just for example & not a recommendation. 

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes. 

Leave a Comment