Here is why you should not invest in closed-ended mutual funds

Published: September 25, 2014 at 9:41 am

Last Updated on August 7, 2016 at 2:36 pm

It is raining closed-ended mutual fund NFOs. Here is why one should avoid this category of mutual funds.

There are many articles that describe the features of closed-ended mutual funds. Therefore, I will not mention them here. Let us focus on the titular suggestion alone.

1) The first and foremost rule of purchasing – be it a financial product or a bottle of shampoo. Never buy anything based on unsolicited recommendations.

There is usually a pretty good reason why a product is recommend to you without your asking for it and it has nothing to do with you!

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Bank branch mangers/relationship managers or mutual fund distributor are eager to push closed-ended mutual funds because of high commissions! In a closed-ended mutual fund, the intermediary is paid the entire commission of the tenure upfront, unlike a SIP or lump sum investment in an open-ended mutual fund.

This is the reason for the aggressive selling.

Yes, yes, yes, not all distributors are like that and all that sort of thing.

Let us choose to believe that investors read the SID cover to cover and chose, of their own free will, to invest an insignificant AUM of 4,500 Crore in such funds. Naturally no one made any promises of high returns to these investors.

Here is a simple way to ensure your relationship manager does not even recognise you as a human being: Invest before you spend and reduce the balance in your SB account to something small asap.

2) What are you doing with a lump sum in the first place?
If you are considering a closed-ended fund, you have a lump sum free to be invested (who on Earth would invest a small amount in such funds?!).

Ask yourself where does this lump sum figure in your scheme of things? Has it been tagged to a financial goal?

A person who has budgeted efficiently, accounted for all present and future expenses (foreseen and unforeseen) will not have any lump sum lying around to invest each time an NFO pops up.

3) Do you know how to expect when you are expecting?

Let us face it. Be it a sector fund or a fixed deposit, every investor has expectations. What are the expectations of a closed-ended mutual fund investor? Especially the ones who choose predominantly equity-based closed ended funds for 3 or 5 years.

Surely it is not a single digit return!

Just because redemptions are not allowed does not make a fund better. What matter is intelligent stock selection and the necessary time for the stocks to perform. There is no evidence that closed-ended funds have performed better than open-ended funds (you can check at VR online).

A skilled, experienced fund manager is certainly a plus for any active fund – closed or open. Unfortunately, that cannot guarantee returns. Equity as an asset class is too volatile for such short periods of time to  have any kind of return expectations.

It is time existing and prospective closed-ended fund investors learn about standard deviation and how compounding occurs in a volatile instrument. You could start here: Understanding the nature of the stock market returns.

A ‘veteran’ fee-based financial planner revered by his colleagues stated to a reporter that closed-ended funds are good because the money is locked-in therefore enabling many investors to spend time in the market. What utter bollocks!

If anyone says three years is long-term for equity investing, they are either trying to sell a product or are clueless about risk.

They call it advisory ‘business’ for a pretty good reason!

Launching equity-based closed-ended mutual funds is an opportunistic exercise by AMCs to lure investors clueless about equity investing. All things that look good on paper (acche din) do not turn out that way. At least not within a definite time frame.

Bottom Line: Closed-ended mutual funds are utterly unsuitable for goal-based financial planning. Stay away  …. unless you like clutter.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)