The trouble with closed-ended equity mutual funds

Last Updated on

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

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, 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. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first 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 WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second 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

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover 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 ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Leave a Reply

Your email address will not be published. Required fields are marked *