Below we take a look at the views of some experts on open vs. close ended funds –
Dhirendra Kumar, Value Research Online
There are advantages and disadvantages to both open-end and closed-end funds. The biggest disadvantage to a closed-end fund is that investors cannot invest regularly. The advantage that such funds do not face the threat of sudden redemption is also a disadvantage because investors are forced to invest the money.
Of course, the fund manager has the advantage of taking a long-term view and he is not subject to investors’ day to day actions, but there is no such evidence in support of superior returns. When I compare the performance from the start of a closed-end fund with a similar open-end fund, I have not been able to find any evidence that closed-end funds do better.
Closed-end funds benefit from the timing perspective, that is, when the fund was launched and how the market was at the time of the launch.
Data Source: Morningstar
“An open-ended scheme is best suited for an investor who prefers more flexibility at managing investments. Close-ended funds, on the other hand, are suited to investors who want to park their funds for a set period and prefer to remain invested.” says Kavitha Krishnan, Senior Research Analyst, Morningstar.
Expenses on close-ended fund tend to be lower as compared to open-ended funds given the longer investment horizon on the funds. Open-ended funds, on the other hand, have a relatively higher expense ratio, considering that they are more actively managed. Also, the past performance of open-ended funds is easier to track as compared to a close-ended fund.
Lakshmi Iyer, CIO and Product head, Kotak Mutual Fund.
“The allocation of funds amongst open-ended, close-ended and ETF is purely a function of risk appetite. In an alpha-generating geography like India, actively-managed funds tend to outperform ETFs over a longer period of time,” says Lakshmi Iyer, Kotak Mutual Fund.
Monika Halan, Author, Let’s Talk Money
The only suggestion to investors around closed-end funds is this: do not buy any equity closed-end funds.
Fixed maturity plans (FMPs) are closed-end funds—use them the way you use a fixed deposit but without the guaranteed return.
The closed-end products have been back on the market for a few years because some fund houses have found a way to keep new products coming. Why are they so keen to launch new products? It allows them to incentivise agents with upfronting a three-year trail commission at the time of sale. Remember that C.B. Bhave took away the 2.25% front load on a mutual fund in 2009 making them a very investor friendly product. The industry then began to upfront trail commissions to give an incentive to the agent. So far so good, but then with the closed-end fund, the fund house could pass on 3-5 years of trail commissions in the first year, allowing agents to hard sell these products.
With the introduction of new categories of mutual funds and the rule that funds can have just one product in every category, the closed-end product launch is now reaching another level of loophole searching.
From media reports and the speeches of the chairman Ajay Tyagi in the past two weeks, it’s clear that the regulatory loophole around closed-end funds will shut down soon.