– What is a closed-end fund?
– Examples of closed-end funds and their performance
– When to invest in a closed-end fund?
- What is a closed-end fund?
Closed-end mutual funds are funds that have a fixed maturity. Units of this type of a fund can only be bought during the period of its New Fund Offering (NFO).
Outside of the NFO period, units of closed-end funds are traded on the stock exchange. Thus, total number of units in a closed-end fund is always constant.
- Examples of closed-end funds in India.
|Fund Name||Type of Fund||Maturity (Days)||Launch Date||Current NAV||BSE Price|
|HDFC Housing Opportunities Series I||Housing Theme Fund||1140||30/11/2017||10.35*||9.56*|
|SBI Tax Advantage Fund Series II||Multicap Fund with Tax Benefit||3650||29/03/2012||37.415*||37.415*|
|ICICI Pru R.I.G.H.T. Growth||Large cap Fund||3636||26/09/2009||43.93*||43.93*|
|Reliance Capital Builder Fund II – Series C||Multicap Fund with small exposure to Fixed Income Securities||1095||27/03/2015||13.17*||11.09*|
*Prices as of 31/01/2018
|Fund Name||Performance||Benchmark Index||Benchmark Index Performance||Underperform/Overperform|
|HDFC Housing Opportunities Series I||3.20% since 30th November, 2017||India Housing & Allied Businesses Index||8.30% since 30th November, 2017||Underperform|
|SBI Tax Advantage Fund Series II||23.99% 5-year CAGR||S&P BSE 500||14.88% CAGR since fund launch||Overperform|
|ICICI Pru R.I.G.H.T. Growth||19.31% CAGR since launch||Nifty 50||10.51% CAGR since fund launch||Overperform|
|Reliance Capital Builder Fund II – Series C||9.95% CAGR since launch||S&P BSE 200||12.41% CAGR since fund launch||Underperform|
Above table shows different types of closed-end funds with different investment strategies for each and varying maturity days and performances with some funds even available at a discount price from their actual NAV.
Above table shows the performance of closed-end funds compared to their benchmark.
- When to invest in a closed-end fund?
- When an investor is looking to invest in a specific theme/sector, or for a fixed time period, he/she can choose a closed-end mutual fund. This fund is advantageous for a fund manager in a bullish market because redemption is done only at the time of maturity and fund manager is not forced to sell the fund investments and can be constant with the fund’s investment strategy but it is not so great when the markets are volatile, as there is no fresh inflow of funds.
- An investor invested in a closed-end fund, who needs the money has no choice but to sell his units at a discount on the stock exchange. This may create an opportunity to invest in such a fund at a below market price as well as for a shorter maturity time than at the time of fund offering.The disadvantage of trading units of a closed-end fund on the stock exchange is the low volume and low frequency of the units being traded.
- In one of my previous posts titled “Dos and Don’ts of Investing in a Sectoral Fund” we discussed the cyclical nature of such funds. When investing in a thematic or sectoral fund which is also a closed-end fund, the timing of the new fund offer and the tenure of the fund becomes important as these are cyclical in nature. Hence, it is important to understand economic conditions of the particular sector before investing.
- An investor should only invest in a closed-end fund when he/she has excess liquidity and risk appetite and is certain that the funds will not be required for any emergencies before the maturity date.
When looking to invest in a closed-end fund, it is advisable to consult your independent financial advisor to seek the best course of action.