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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

With close-ended funds, mutual fund industry is inviting big trouble

With practically all the mutual fund companies already having multiple equity funds to offer, there is simply no justification whatsoever for them to launch new equity-oriented fund offers... and that too close-ended ones.

Firstly, where is the need to launch new equity funds, when there are so many excellent existing schemes to choose from? In terms of returns, it makes absolutely no difference to the investor, whether it is new fund or an existing one. 

In fact, an existing scheme is better, as you get a chance to evaluate its performance. Moreover, with a portfolio known beforehand, you can check whether it will complement your other investments or end up as a mere clone bringing in no value-addition.

It is indeed unfortunate that mutual fund industry is taking undue advantage of the common investor's biggest misconception that a new fund @Rs.10 NAV is cheaper...  and better... than an existing fund with say Rs.500 NAV. [Discover the truth 'Did you know that NAV of a mutual fund has 'zero' impact on your returns?']

Secondly... and this is really criminal... by launching close-ended funds, AMCs are denying the investors the benefit of the biggest risk management tool. As is well known, one-time investment in equity is extremely... extremely... risky, particularly now when the market valuations are not cheap. Therefore, it is always prudent to spread out your equity investment over a longer time frame using SIP (Systematic Investment Plan). In close-ended funds SIP does not apply.

Besides, with close-ended funds you also lose liquidity of your investment.

The logic that the lock-in helps the fund manager to deploy the funds more productively is a mere marketing gimmick. Fund managers have done a great job with open-ended schemes. They don't need the crutches of the concept of lock-in to deliver better results.

It is indeed unfortunate that mutual fund industry is doing this for the sole reason to be able to pay higher commissions to its distributors and attract more funds for itself.

Such short-term measures have backfired very badly in the past. In fact the very reason why mutual fund industry has not been able to earn the trust of an Indian investor is precisely because it has always looked at its own short-term interests rather than creating conditions for a mutually beneficial long term association. And that is why it is struggling despite having the best investment product to offer. [Must read 'Best investment mysteriously ignored by most Indians' and 'Are you missing out on mind-boggling returns?']

I wonder why SEBI, which has done an admirable job in regulating the mutual fund industry, is allowing this farce to be perpetrated on the innocent investors.

I am afraid that in a few years time if the markets are down when these funds mature, mutual funds companies would have created many disillusioned investors. This is surely not good for any business that wishes to flourish and prosper for many many years.

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