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Dubious rebirth of Close-ended Equity MFs

Like a phoenix rising from the dead, close-ended equity mutual funds too seem to be making a comeback after being assumed dead for many years.  Recent months have seen quite a few mutual fund companies launching close-ended funds as against the more popular open-ended equity funds.

And 'surprisingly' investors have poured in lots of money in such schemes. Surprisingly because, given the stagnant equity markets, they have 
- not only ignored the existing open-ended equity funds 
- but also withdrawn their old investments in such funds.

So why this sudden love for close-ended equity funds? Are they better than the open-ended funds? No, (as I point out later), close-ended funds are, in fact, avoidable. However, more money has flown to close-ended equity funds because of one simple reason... high commissions.

As you would be aware, few years back SEBI did away with the entry loads on mutual funds. This entry load was paid to the distributors as their commission. So with the banning of entry load, hardly any commissions came their way. As such many mutual fund distributors closed shop and stopped selling mutual funds. 

Even though entry loads have not been reintroduced, MF companies are able to give higher commissions in close-ended funds as the corpus collected stays with them for five years (the normal lock-in period in such funds). Since more commission is coming their way, distributors are able to hard-sell such funds. And given the ignorance of a general investor, they has been able to lure many investors.

Benefits being cited are
a) As there is no fear of redemption, the fund manager can take long term bets. (But my contention is that he can do so, and has done so, even in an open-ended fund.)
b) During market crashes, the investor cannot redeem his money in panic and is thus protected from irrational decisions. This is the only real benefit of a close-ended fund. (But my contention is that an informed investor will not make this mistake.)

Why close-ended equity funds are avoidable?
a) Being a new fund, there is no track record to assess its performance
b) There is no portfolio as yet. So we can't ascertain whether it will bring value-addition to our existing investments or end-up as a mere duplication
c) It is always advisable to spread out investment in equity through SIP in an open-ended fund rather than investing lump-sum in a close-ended one
d) You lose liquidity due to the long lock-in
e) Even if the fund fails to deliver good performance, you can't exit it

As the advantages of open-ended funds far outweigh the so-called benefits of a close-ended fund, it is strongly advised that investors keep away from close-ended funds. And a sincere request to the mutual fund companies (in case they read this blog)... please think of investors' long term interest instead of chasing short term profits for yourself. This is in your interest... and survival... too. 

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