Important tips to make the best of close-ended mutual funds

Important tips to make the best of close-ended mutual funds

by 5paisa Research Team Last Updated: Mar 16, 2023 - 05:35 pm 168k Views
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With prices soaring on the back of the ever-rising inflation, more and more people are considering mutual funds as a reliable source of extra income. Mutual funds not only give better returns but also do so while diversifying the risk involved. With the power of compounding and rupee cost averaging, mutual funds have very efficiently managed to give inflation-beating returns and drawn a lot of investors’ attention in the market.

With the high demand for mutual funds, some very efficient funds declare themselves as closed-ended mutual funds, meaning that they cater only to a limited set of investors. Due to this, close-ended mutual funds raise the capital only through the IPO (Initial Public Offering) route.

How are close-ended mutual funds advantageous?

Close-ended mutual funds are often preferred by a large number of investors due to the following advantages it holds:

  • Portfolio Management: Close-ended mutual funds are efficiently managed by professional fund managers. Since the volume is pre-planned, they are generally devoid of any unnecessary chaos and mismanagement.
  • Have stable securities in the portfolio: As closed-ended funds are planned well in advance, the number of shares and the securities which are to be invested in is pre-decided as well.
  • Dividend reinvestment plans: Close-funded mutual funds often have the option of dividend reinvestment, where the dividend earned on the investments is further reinvested to upscale the investment value.  This helps in compounding the investment and results in a much higher Net Asset Value (NAV) of the investment, especially in the long-term.
  • Close-ended funds are not affected by market panic: Investors don’t sell their shares in panic due to low liquidity and this remains a plus point especially when it comes to bringing stability. This does not let redemption pressure to come overhead.

Tips to make the best of close-ended mutual funds

If you too are looking forward to making investments in close-ended mutual funds and make the best of the above advantages, here are the tips which could help you out:

  • Thoroughly analyze the portfolio: There’s no past history or real-time analysis of the fund as it is declared and available only during the IPO. This means you have to completely rely on your analysis of the portfolio. Before making any decision, you need to ensure that the portfolio you have chosen has the right set of securities for a better return on investment.
  • Consider the low liquidity of the fund: Close-ended mutual funds offer low liquidity, i.e. unlike open-ended mutual funds, you do not have the option to exit anytime. The only way you can sell a close-ended mutual fund prior to maturity is on the stock exchange. This means you need to make sure that you can afford to fix your funds for a longer duration.

No SIP option available: If you do not have a large amount to invest in one go and are looking forward to a SIP (Systematic Investment Plan), then you need to consider this. Close-ended mutual funds do not offer the option of SIP, hence, you need to invest whatever amount you want to in one go during the IPO declaration.

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