Closed ended mutual funds

Closed ended mutual funds

There are two types of mutual funds which are Open ended funds and Close ended funds. In this article, our focus will be on Closed-ended mutual funds. The Closed-ended mutual funds allocate a predetermined number of fund units which are traded on bourses. The Close-ended funds work like an exchange-traded fund rather than a mutual fund. Similar to stocks they are issued through new fund offer to raise money and then traded in the open market. Although the worth of the fund lies on the Net Asset Value, the realvalue of the fund is proportional to demandandsupply as it can trade at prices below orabove its real worth. Thus, closed-end funds may trade at discounts or premiums to their Net Asset Values. The Units of closed-ended funds are bought and disposed with the help of broker. Closed ended mutual funds generally trade at discounts to their underlying asset worth. Such funds said to have a set maturity period.

Closed ended funds calls for lumpsum investment and do not offer a withdrawal option until maturity. Thus, investors with an investible amount and an investment horizon in line with the maturity date of the fund scheme could opt for closed ended mutual funds. Moreover, the risks and returns should be examinedon the basis of the asset allocation of the scheme mentioned in the offer document.

The advantages of close ended mutual funds are listed below:

  • In closed-ended funds, the investors couldwithdraw their units on predefined dates only. That is the time when the fund expires or matures. This enables portfolio managers to obtain a stable base of assets, which is not subject to frequent withdrawals. A stable asset base lets the fund manager to devise an investment strategy more conveniently. In the case of stable asset bases, the fund managers could also keep the fund objectives completely in mind without having to stress about the outflowsandinflows.
  • Like equity shares, the closed-ended funds mainly trade on stock exchanges. This gives achance for investors to sell or buy fund units on the basis of real-time prices, which can be below (discount) or above (premium) the Net Asset Value of the fund. They could further make use of the regular stock trading methods like margin trading and limit or market orders.
  • As per the fund norms, investors are permitted to liquidate the closed-ended funds. At the prevailing market prices, investors could use real-time prices present during the trading day to purchase or sell closed-ended fund units. This facilitates the essential flexibility to make decision on their investments by using real-time information.

The disadvantages of close ended mutual funds are listed below:

  • The Performance of the closed-ended funds has not been at par with its open-ended counterparts across distinct time horizons. The lock-in period on closed-ended funds which is targeted at providing the fund managers the flexibility to allot the funds without the fear of outflows has not assisted much in giving better returns.
  • Closed-ended funds calls foran investor to invest a lump sum amount at the moment of their launch. This could be a risky approach to deal with an individual’s investments. It exposes investor to bet bigger than otherwise warranted. Further, a big number of salaried class of investors are not able to afford lump sum investments. They rather choose staggered investments through the routeof systematic investment plans or SIP.
  • Investors couldevaluate the performance of the funds over distinct market cycles on account of availability of past data in case of open-ended funds. On the contrary, the track record is unavailable in the case of the closed-ended funds. Thus, investing in a closed-ended fund invites uncertainty and unpredictability for which investors can only rely upon the fund manager.

Debt and Equity funds are taxed in a different manner. Hence, the tax rates depend on the percentage of investments made by the scheme in equity and debt in the case of Closed Ended Mutual Funds. It is treated as an equity fund for tax purposes if the fund invests 65% of its total assets or more in equity and equity-related instruments. Whereas it is treated as a debt fund for tax purposes if the fund invests at least 65% of its total assets in debt instruments.

  • What is a closed ended mutual fund?
  • The Closed-ended mutual funds allocate a predetermined number of fund units which are traded on bourses. The Close-ended funds work like an exchange-traded fund rather than a mutual fund. Similar to stocks they are issued through new fund offer to raise money and then traded in the open market. The closed-end funds may trade at discounts or premiums to their Net Asset Values. These funds said to have a set maturity period.

  • Who all can invest in a closed ended mutual fund?
  • Closed ended funds calls for lumpsum investment and do not offer a withdrawal option until maturity. Thus, investors with an investible amount and an investment horizon in line with the maturity date of the fund scheme could opt for closed ended mutual funds.

  • What are the advantages of a closed ended mutual fund?
  • One of the advantages of the closed ended fund is stable base of assets which meansinvestors couldwithdraw their units on fixed dates only that is the time when the fund matures. Another advantage is the closed-ended funds mainly trade on stock exchanges whichgives achance for investors to sell or buy fund units on the basis of real-time prices, which can be below (discount) or above (premium) the Net Asset Value of the fund.

  • What are the disadvantages of a closed ended mutual fund?
  • One of the disadvantages of the closed ended fund is closed-ended funds calls foran investor to invest a lump sum amount at the moment of their launch. This could be a risky approach to deal with an individual’s investments as it exposes investor to bet bigger than otherwise warranted. Another disadvantage is the unavailability of past data in the case of the closed-ended funds. Thus, investing in a closed-ended fund invites uncertainty and unpredictability for which investors can only relyupon the fund manager.

  • How taxation works in the case of a closed ended mutual fund?
  • The tax rates depend on the percentage of investments made by the scheme in equity and debt in the case of Closed Ended Mutual Funds. It is treated as an equity fund for tax purposes if the fund invests 65% of its total assets or more in equity and equity-related instruments. Whereas it is treated as a debt fund for tax purposes if the fund invests at least 65% of its total assets in debt instruments.