The trouble with closed-ended equity mutual funds

Published: February 3, 2016 at 9:11 am

Closed-ended equity mutual fund NFO started cropping up frequently a little before the 2014 Lok Sabha elections. They represent the efforts of AMC and distributors to lock-in AUM and therefore, profits regardless of market volatility.

I had earlier written about why one should not invest in closed-ended mutual funds from a financial goal planning point of view. In this post, I would like to add a couple more points that investors tend to forget while investing in closed-ended mutual funds, especially the equity-based ones.

Are closed-ended fund better than open-ended funds?

Many claim that equity closed ended mutual funds will provide ‘better’ returns because the fund manager can function without fear of redemptions. The same myth exists about ELSS Fund Lock-in too!

It is impossible to compare returns of closed-ended funds and open-ended funds unless they started  on the same day with identical portfolios!  This is true for ELSS vs other categories too, but at least ELSS funds are not truly closed-ended funds.

Since this question cannot be answered logically, there is no point asking it!

The concept of a ‘maturity date’ is dangerous!

Closed-ended funds have a maturity date at the end of which the investor could either redeem or let the investment continue if the AMC chooses to convert the fund as open-ended.

A maturity date for an equity fund is as silly as it is dangerous. The typical investor would end expecting ‘good returns’ at the end of 3 years or 5 years. This may or may not happen with pretty much equal probability. Read more: Equity investing: How to define ‘long-term’ and ‘short-term’

Sure, there are disclaimers to this effect all over the place. How many read them? How many understand them? How many salesmen mention the high proability of losing money in such funds?

Equity closed-ended funds are only suitable for those who clearly understand volatility.

In a FMP which is a debt closed-ended fund, the concept of a maturity date makes sense. As long as the bonds are not devalued in terms of credit rating, there is more than a reasonable chance of getting ‘good returns’. Read more: Understanding Credit Rating Risk in Debt Mutual Funds

This is also true of the NPS (the biggest closed-ended mutual fund!) if it has no equity component.  I know of investors who have 50% equity exposure in NPS and yet talk about the ‘maturity value’. Read more: NPS investments are mutual fund investments!

If you are not an experienced equity investor, I would strongly suggest that you stay away from equity closed-ended mutual funds.

Do share if you found this useful

Share your thoughts on this topic in our  YouTube Community

Use our Robo-advisory Excel Template for a start-to-finish financial plan!

Join our courses in exclusive Facebook Groups!

  • 500+ members are now part of our new course, How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner wanting more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills, building a community that trusts you and pays you!
  • 1822 members have signed for Goal-based portfolio management (watch 1st lecture for free). This is an online course to reduce fear, uncertainty and doubt while investing for a financial goal. Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners on a monthly basis
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only 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, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
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 low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, 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 199 (instant download)
Free android apps