Keep in mind before investing in close-ended funds

There are many types of schemes available in the market such as closed-ended and open-ended. Although before investing in all types of schemes, we should get complete information about these, but special care should be taken while investing in close-ended funds. So through this article we are going to inform you about such things, which you should take care of before investing in a closed-ended fund.

Close-ended fund

A close-ended fund is a professionally managed portfolio, consisting of multiple assets. It raises a certain amount of capital through NFO (New Fund Offer). It is listed on the stock exchange. Also, like mutual funds, they are also traded in the secondary market. Close-ended funds have a fixed maturity period. Until this period, money is applied in them. You cannot withdraw money before this period. If one wants to withdraw money before maturity, one can sell on the stock exchange like shares. An investor in an open-ended fund can invest and withdraw money at any time as per his choice. You can increase or decrease the investment as per your convenience, but have to invest lump sum in a closed-ended fund. While investing in a closed-end fund, keep in mind the following things –

Comparison is not possible due to absence of previous record – Like open-ended mutual funds, it is not possible to track the past performance of closed-ended funds, as close-ended funds are offered with a new fund offer (NFO) which has no previous record. They are open to investors only till the initial offer period. It is also not possible to do real time tracking. Lack of past records makes it difficult to review the fund’s performance and make investment decisions. It would be very difficult to compare without previous or real time figures.

Lack of liquidity – If you want to invest in highly liquid investment options, then close-ended funds will not be right for you, as they have low liquidity. These funds cannot be redeemed before maturity if required. The only option is to sell the units on the stock exchange if you need to.

Focused Portfolio – Due to the closed structure of these funds, fund managers have the opportunity to invest in equity, which gives high returns. Therefore these funds maintain a focused portfolio. But when the size of the portfolio decreases, the expense ratio increases. The expense ratio is the cost that is taken by the mutual fund house to manage the investors’ money. This includes administration costs, legal costs, advertising costs, etc. Close-ended mutual funds invest only in a few funds and also have a high expense ratio.

Lack of SIP (SIP) option – SIP stands for Systematic Investment Plan. Most mutual funds encourage systematic investment. Through SIP you can invest a fixed amount of money in a mutual fund at regular intervals. Most salaried employees prefer to invest through SIP.

How to decide to invest in a closed-ended mutual fund in this situation?

All these funds are managed by professional fund managers. Based on past experience and performance of these fund managers, it can be decided to invest in chlor-ended funds.

Benefits of investing in closed-ended funds

There are some drawbacks of investing in a closed-ended fund, the benefits are also many, some of which are given below –

Opportunity to choose a fund with different objectives and income – An important feature of a close-ended fund is that investors have the opportunity to choose funds with different objectives as well as income. This type of opportunity is not available in open-ended schemes.

Time constraint – Close-ended funds have a specified duration, so they should not be panicked and sold based on market dynamics. The maturity period can be 3 years, 5 years and more. This facilitates fund managers to make strategic decisions regarding managing the fund. Investors should not pressurize fund managers during the investment period, although they may make suggestions to fund managers.

Dividend Reinvestment Scheme – These funds have the facility to reinvest the dividends received. This means that your units can be higher at no additional cost. Like an open-ended fund, it does not require additional money to buy additional shares in the open market.

How much should one invest in a closed-ended fund?

An investor can allocate 5–10% of his investment to a closed-end fund. Investors can invest this amount in many schemes instead of putting it in a single scheme, this reduces the risk.