Taking advantage of the investment market, fund houses have introduced new close-ended schemes to woo investors. Fund houses have introduced 12 new close-ended equity schemes during the last quarter of 2018, according to the AMFI report. As a result, investors are eager to try their luck by investing in close ended schemes. If you also want to make this kind of investment, then through this article, such things are being told for you, which you should know before making such a decision.
Can not compare past records and real-time
Before investing in any open ended mutual fund scheme, investors can analyze the past performance of the fund in various market circles and take a decision based on this. But when it comes to close-ended mutual fund schemes, investors have to rely on the expertise of the fund manager. Because the close ended mutual fund scheme has no track record. These schemes are mostly launched with NFOs and are not available to investors after their initial offering period, so most rating agencies do not rate them. Lack of track record means that investors cannot compare past performance of such schemes through market circles and also cannot compare them to other equivalent schemes.
Focused portfolio and high expense ratio
These funds are known to invest in small-sized portfolios, which consist of only a few stocks. In such a situation, the portfolio of these funds is fixed, which can be risky for investors. Its expense ratio is also high. This fund is regulated by SEBI. Due to the small size of closed-end funds, their expense ratio is high. The fee can only be reduced if the portfolio includes additional stocks.
Liquidity is reduced
As we already know that close ended schemes have a lock-in period. This means that investors cannot exit the fund in any financial emergency. So invest in it only after a lot of thought. Also, these schemes are not liquid, as the units cannot be redeemed or sold when you need them. These funds are not suitable for investors who require interim funds during the investment period. Investors also cannot exit the fund due to underperformance of the portfolio. However, investors have the option of selling their schemes on the stock exchange through the demat format. Investors wishing to invest in close ended funds can buy your units when traded on the stock exchange.
No SIP option
Most retail investors are willing to invest limited money in stock market assets due to risk factors. With the help of SIP (SIP) mode of investment, investors can regularly invest a fixed amount on a fixed date on a monthly and quarterly basis. The investment through SIP reduces the financial burden as compared to lump sum investment. The closed-ended scheme lacks the SIP mode and that is why most investors prefer the open-ended scheme. In addition, investors have to invest a lump sum in such funds, as there is no flexibility to invest in a closed-ended scheme. However, the fund is less likely to be affected even if the market falls, as the close-ended scheme has lower average cost of Rs. The performance of the fund depends entirely on the timing of the fund. In order to achieve maximum returns and reduce risk, fund managers must decide the opening and closing dates of funds.
Benefits of investing in close-ended mutual funds
- Close-ended mutual funds have a specific maturity period. Investors aiming to build a large fund can invest in such schemes without worrying about the fluctuations in the regular market. Investors investing in these schemes cannot exit on their own. That is why such schemes provide a more stable basis for the fund manager to manage the fund during its period. These fund managers do not have to grapple with the uncertainty of redemption. The returns of such funds are not affected by stock market fluctuations. The returns to investors depends on the opening and closing date of the fund.
Close ended schemes are important in a way because they require a specific duration. This strategy can be used by select investors who are willing to invest in a different risk profile.