Close-ended funds are mutual funds with a fixed number of shares that are issued through single Initial Public Offering (IPO). All the capital is raised through this one offering and no new money will flow into the fund, thus making the number of shares fixed. The subscribers to the close ended funds are paid back after a specified period of maturity. Close-ended funds are overseen by a professional fund manager who analyzes the portfolio and actively buys, holds, and sells assets.
Though close-ended and open-ended mutual funds work similarly, the main difference lies in the fact that they’re fixed and flexible respectively. Open-ended funds accept new investment capital and issue new shares accordingly. They buy back their own shares on-demand as well. This doesn’t happen in close-ended mutual funds.
This post gives you valuable insights into close ended mutual funds, how they work, benefits, taxability and if you should invest. Read on!
In close-ended funds, once the NFO (New Fund Offer) is completed, no additional units are allowed to be subscribed by the general public. Closed funds ensure that the fund manager always has a fixed amount of funds to work with, and thus provides a greater degree of freedom to the fund manager. On paper, close-ended funds should generate higher returns, when compared to similar open-ended funds.
Some close-ended funds are publicly traded in the stock exchange, allowing willing investors to purchase the units of mutual funds (thus effectively liquidating one’s position). Since no additional investments can be made after the NFO, SIPs are also impossible in this type of fund.
Close Ended funds are suitable only for individuals with a significant corpus, and the patience to wait till the maturity date of the close-ended fund. Most close-ended funds require lump-sum investments, and cannot be redeemed until the date of maturity.
The risk-reward expectations will vary based on the underlying assets the close-ended fund invests in. Each close-ended fund is different and requires independent research on the scheme before investing in one.
Here is a list of some of the most popular close-ended funds in India:
|Scheme Name||3 Year Returns (%)||5 Year Returns (%)|
|SBI Tax Advantage Fund – Series III – Regular Plan||9.60||13.02|
|ICICI Prudential Growth Fund – Series II||10.98||12.99|
|SBI Tax Advantage Fund – Series II||9.68||12.88|
|ICICI Prudential Growth Fund – Series I||9.08||11.83|
|ICICI Prudential R.I.G.H.T Fund||6.99||10.00|
|Reliance FHF XXV Series 15||8.38||9.00|
|HDFC FMP 793D Feb 2014 (1) Reg||7.32||8.42|
Depending on the securities invested by the mutual fund, the treatment of gains in taxation varies as follows.
For equity-oriented close-ended funds (where >65% of total assets invested in equity/equity-related investments):
All other funds:
It is strongly recommended that you calculate the tax necessary to be paid using both methods, before choosing whether or not it’s suitable for you to opt for indexation benefits.
Typically in an open-ended fund, the NAV (Net Asset Value) of the mutual fund is the price at which you buy one unit of that mutual fund. However, in the case of close-ended mutual funds, the NAV doesn’t necessarily reflect the price of the Unit. Since close-ended funds are usually traded in the secondary market, the market forces of supply and demand determine the pricing of the units.
Should the fund perform exceedingly well, or be managed by a fund manager with a stellar track record there are high chances that the unit is traded at a price well above the NAV.
However, on the other hand, if one particular close-ended mutual fund performs poorly, or has a history of high volatility, these units will only be traded at a discounted price.
As close-ended funds allow the fund manager to operate with a fixed amount of funds and without the necessity to maintain generous cash reserves to repurchase units of mutual funds, fund managers have a higher degree of control, flexibility, and freedom. In theory, close-ended funds should perform better than their open-ended counterparts.
While on the face of it, it may seem like close-ended funds are liquid (as redemption is not allowed till the date of maturity), secondary market trading in the stock market acts as a wonderful avenue for investors to liquidate their position, should the need arise.
The close-ended funds, since they’re priced purely based on the market forces of demand and supply, you’ll always have a fair valuation of how well the mutual fund is performing, at any given point in time.
Close-ended funds are ideal for people who trust a particular fund manager to lock in a lump sum amount for a specific period of time. Usually, for close-ended mutual funds, liquidity is only provided through the secondary market. These funds usually tend to come with a higher expense ratio, much unlike Navi’s wide array of mutual fund schemes – which come at a low expense ratio, thanks to our tech-driven approach. To start investing, visit Navi Mutual Fund.
*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully
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