Closed-ended mutual funds: Is it a fruitful investment option?

The closed-ended mutual funds are pooled investment funds that are thoroughly overseen by fund managers with expertise in the investment market.  The closed-ended mutual funds raise a predefined amount of capital just once through the systematic Initial Public Offering (IPO) which is completed by the issue of shares that are purchased by the investors in the closed-ended mutual funds as stocks. When compared to the regular stocks, the closed-ended mutual fund stocks primarily represent a rate of interest in specialised portfolios of securities which are thoroughly managed by professional investment advisors. It also concentrates on specific industries, geographic sectors and investment markets. Market forces like demand and supply along with the fluctuating value of securities in fund holdings tend to affect the stock prices of closed-ended mutual funds. 

The reason why closed-ended mutual funds are not good investment options

When it comes to closed-ended mutual funds they have their share of drawbacks that make them bad investment options. Some claim that close-ended mutual funds are not a very suitable fit in a well-designed investment portfolio that is driven on the basis of goals and hence they are not considered to be good investment options for the investors.

The following explains the drawbacks in details that deem the closed-ended mutual funds as a favourable option of investment:

  • No track record: An investment in a closed-ended mutual fund is a New Fund Offer (NFO) which generally doesn’t have a track record of its performance. This means there won’t be any data that will help you analyse its performance when compared to the other investment options and will be unsure about the success of the fund on the chosen theme.
  • Low on liquidity: Closed-ended mutual funds come with a fixed lock-in period which means one cannot exit from the fund before the completion of a fixed duration even when the performance is below expectation. Though an investor can sell out their stock exchange holding, such transactions are very rare in nature and often happen at a discount.
  • Restriction on systematic investment: In a volatile market condition, investment in equity market through systematic transfer or systematic investment plan are deemed as smart moves. However, closed-ended mutual funds require a lump sum investment that restricts the investors from availing the benefit of cost averaging through purchase.
  • Restricted scope of asset allocation: If you intend to follow a goal-based planning, you must be aware of the importance that anasset allocation has in an investment portfolio.
    When a person invests in closed-ended mutual funds, they lose the option of rebalancing their portfolio. The restriction in an additional purchase and partial withdrawal hinders the growth of an investor in a volatile market.

Choose an investment option after comprehending its pros and cons and ensure your chosen option has a good track record and is managed by reliable fund managers. Consult our team of reliable financial experts to find out more about investment options that will help you meet your financial goals easily.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Wealth Redefine is a AMFI registered Mutual Fund distributor – ARN - 167127

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