Close-Ended Mutual Funds
Close Ended Mutual Fund plans come with a lock-in period. An investor can not cancel his investments in these plans before a certain span of time. These kinds of schemes have certain benefits as well as disadvantages.
Advantages of Close-Ended Mutual Funds
- Investment in close-ended funds is great if a long-term investment is made. A long-term investment always provides a splendid return.
- Many modern schemes have a decent balance of exposure to debt and equity, thus minimizing risk.
- The main aim of these schemes is to obtain income tax advantages. Besides this, there is little advantage to these systems.
Disadvantages of Close-Ended Mutual Funds
- In case of an emergency, the investor cannot access his investments.
- These schemes mainly invest in debt instruments with a low distribution of equity.
- The investor cannot time and create redemption appropriately to the fluctuation of his investment valuation.
How Close-Ended Mutual Funds work
While a closed-end fund has several distinctive features that differentiate it from an open-ended fund, such as a mutual fund or exchange-traded fund (ETF), it also shares a number of similarities with these two securities. A investment advisor runs both closed-end funds and open-end funds through a portfolio trading leadership team. Both also pay an annual expense ratio and may allow payments to shareholders of earnings and capital gain.
A closed-end fund is structured as a publicly traded investment firm and a SEBI registration is required for both it and its portfolio manager. Unlike most ETFs or index mutual funds, it appears to be actively managed, and its securities portfolio typically focuses on a particular industry, geographic market, or market sector.
Close Ended Mutual Funds vs. Open-Ended Mutual Funds
Both open-ended and close-ended mutual fund schemes yield the same level of return if maintained for the same time period. There is, therefore, no significant distinction in the two schemes ' returns.
An investor often liquefies his position in open-ended schemes to satisfy his expenditures. A close-ended scheme disciplines an investor and forces him to remain invested for a longer span of time.
Things to know before Investing in Close-Ended Mutual Funds
Units of close-ended mutual funds are generally bought and sold through brokers and distributors.
The portfolio of investments has not yet been established in the case of a newly issued closed-end fund, so that investors do not know what the investment assets are and, in the case of bond funds, the returns on those investments.
A closed-end fund is developed when an investment firm collects money via an IPO and then trades its shares like a stock on the public market.
Closed-end funds often give greater yields or stronger flows of revenue than their counterparts in the open-end fund.
A closed-end fund's value fluctuates by supply and demand, as well as by the evolving values of the shares of its portfolio.
So, it varies on where the customer wishes to spend. If he is comfortable investing for a longer span of time, then close-ended mutual fund plans are also a useful investment instrument as long as the investor has no rush to get his funds out.