Close Ended Mutual Fund

 

This type of scheme has a fixed maturity period and investors can invest only during the initial launch period known as the New Fund Offer (NFO).

Once the offer closes, no new investments are permitted. The market price at the stock exchange could vary from the scheme’s NAV, because of the demand and supply situation, unit holder’s expectations and other market factors.

The option to sell units directly to the mutual funds through periodic repurchase will be given by close ended schemes.

SEBI Regulations make sure that at least one of the two exit routes is provided to the investor.

 

Let’s see some of the closed ended Mutual Funds.

Name of the scheme	Returns
	1yrs	3yrs	5yrs
SBI Tax Advantage Fund Series 111 – Regular Plan	2.61	9.6	13.02
ICICI Prudential Growth Fund – Series 2	3.31	10.98	12.99
SBI Tax Advantage Fund Series 11	-2.26	9.68	12.88
ICICI Prudential Growth Fund – Series 2	4.39	9.08	11.83
ICICI Prudential R.I.G.H.T. FUND	-12.14	6.99	10
Reliance FHF XXV Series 15	8.28	8.38	9
HDFC FMP 793D Feb 2014 (1) Reg	9.97	7.32	8.41

Advantages of Closed Ended Mutual Funds!

• Stability for the Funds Managers

Since in a closed ended fund, investors is not eligible to redeem their units before the maturity date, the funds managers have a set asset base to work with i.e they get a time frame so they can provide time to grow the funds but in my opinion they haven’t utilised this as their Advantage. They are not worried about maintaining liquidity since there are no redemptions. This puts the fund manager in a good place to create a strategy that can help him achieve the investment objectives of the scheme.

But by the performance we can assume that the funds manager are not able to produce ROI in closed Ended Mutual Funds.

• Market Price Based on Demand and Supply

Like equity Shares, the units of closed ended schemes are sold on the stock exchange at price determined by the demand and supply of the units of the scheme. Hence, if the demand for a particular closed ended scheme increases and the supply remains low, then the units can sell at a price much above the NAV of the scheme.

• They are not illiquid.

Closed Ended fund might seem illiquid since the AMC’s  doesn’t allow redemption of units, but the stock exchange offers umpteen opportunities to buy/sell the units. In fact, closed ended funds offer a high degree of liquidity to AMC’s. So this gives a great opportunities to the fund manager to switch the fund and bring better returns.

 

Disadvantages of Closed Ended Mutual Funds!

• Not a great performance in the past

The fund manager of a closed ended fund have a great opportunities to create investment strategies and to bring good ROI on the investment but however, if we look at the performance of closed ended funds in the past, it doesn’t seem to reflect better returns as compared to the open ended mutual funds.

• Only Lump Sum Investment option available.

Since in closed ended mutual fund you can purchase the units of a closed ended scheme only during the launch period, you will require to put lump sum money in the investment. This increases the risk (Ex. if the fund allows entry in the fund but at the mean time market is at it peak so one is not able to take advantage of any correction or bounce of the market as entry and exit is bounded in the fund) Also. many investors prefer the systematic investment plan (SIP) approach to investing as it is affordable and spreads risk.

• Highly Fund Manager Driven

Normally, Mutual Funds Investors tends to analyse the performance of the fund over different market conditions to assess if investing in it is good option or not. While this information is readily available for open ended schemes, in case of closed ended funds, this data is not available. Hence, the performance of the fund largely depends on the decisions of the fund manager.

 

Let’s Understand Closed Ended Mutual Fund through an example:-

Suresh want’s to invest in mutual fund and his advisor suggested him about SBI dual advantage fund as this is a closed ended mutual fund one can invest between a particular date and will get mature in a particular date. Suresh invested 10 lac on 04 april 2020 and at that time market was performing average and at the time when it got mature  in 04 april 2023 market is at its high, the growth will be very high but if the same thing happen opposite then Suresh may have to suffer a loss or may get very low return since at the date of maturity it will get redeemed as per the fund value.

So, before investing in closed ended fund take care of you planning and decide in before about your need and goals.

The best thing is to consult with 2-3 advisors before investing everyone will give their opinion and you must decide it by your own.

If you require Consultation or Advice you may contact us.

Next Blog will be on Mutual Funds Scheme’s

1. Equity Schemes
2. Debt Schemes
3. Hybrid Schemes
4. Solution Oriented Schemes
5. Other Schemes

—————————————–Stay tuned———————————————–