As the name implies, a closed-ended mutual fund is one in which investors cannot enter or exit until the fund’s maturity date. Because these funds are listed on stock markets, investors can exit the fund before the maturity period as well.
Alternatively, there are different types of mutual funds. We can classify mutual funds into various aspects based on their underlying asset class and structure. Based on their structure, mutual funds are divided into closed-ended funds, open-ended funds, and interval funds.
Open-ended funds are the most popular mutual funds, and closed-ended funds come in next.
Both options offer something that the other does not, but whether that is beneficial depends on your specific financial situation. Each type of investment has its positives and negatives, which we will look into in this article.
What are Closed-end Funds?
Talking about the demand for closed-ended funds, we can say that it has gradually declined over these years. From 1350 closed-ended schemes in Jan 2017, there are only 349 schemes in Jan 2021, as per AMFI data.
Investors can buy units of these funds during the New Fund Offer (NFO). After that, anyone who wishes to invest in this fund can do so on the stock exchange, where it will be listed.
While the fund houses can set the term of the closed-ended funds, currently, most closed-ended funds have a predetermined term of around three years.
Should You Invest in Closed-End Funds?
Every investment may not be suitable for everyone. So, it is essential to look at the various aspects of the investment option before investing in it.
Here are some parameters that you need to consider that will help you understand whether you should invest in closed-ended funds or not.
Investment Frequency
Under normal circumstances, closed-end funds are open for investment during the NFO period. After the NFO period is over, the scheme is closed for investment.
This makes closed-end schemes similar to fixed deposits.
So, if you have a fixed lump sum amount you want to invest until the maturity period, you can look at closed-end funds.
But, if you are looking for an option where you can regularly invest to accumulate funds to fulfill a certain goal, closed-end mutual funds might not be the right investment option.
It is also important to note that you can’t invest in closed-end mutual funds through Systematic Investment Plans (SIP).
Minimum Investment
The minimum investment amount to invest in a closed-end mutual fund is Rs. 5000. While it doesn’t sound like much, many people may not be willing to invest that amount in a new fund. On the other hand, if you invest in an open-ended mutual fund, you can start investing in it by setting up a Systematic Investment Plan (SIP) with a minimum investment amount of Rs.500.
Liquidity
One of the major features of closed-end mutual funds is their maturity period. Although you can exit your closed-end funds through Stock Exchange, the demand for these units on the secondary market might not be very high. You might face some issues while withdrawing money from these funds. So, if you think you might require the money after some time, it would be best to avoid closed-end mutual funds.
Before investing in any investment option with a lock-in period or a maturity period, it is good to have enough savings that can help you through emergencies. This will ensure that you don’t have to rely on investments that are not easily redeemable for your emergency needs.
Time Horizon
We have already seen that closed-end mutual funds have a specific maturity period. After the maturity period is over, the invested amount and the returns are credited to the investor’s account.
You may look at closed-end funds if your investment horizon is aligned with the maturity period of the fund.
Asset class
Equity and debt are two major asset classes. However, out of the 349 closed-ended schemes, 310 are debt-oriented. By looking at this figure, we can conclude that closed-end funds are better suited for conservative investors than risk-averse investors.