Close-ended funds are not for active investors

While close-ended funds can suit investors who worry about market volatility, long term investors must invest through an SIP in an open-ended fund

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While the stock market has been highly volatile with a downward bias, mutual fund houses are back to launching close-ended equity funds. 

ICICI Prudential has launched India Recovery Fund - Series 4 and Birla Sun Life has launched Emerging Leaders Fund - Series 7.

Birla Sun Life's new fund will invest in mid- and small-cap companies. The fund house makes a case for investment pointing out that these companies have seen lesser correction, while showing stronger corporate earnings growth. And the fund house believes that are strong indicators that market will turnaround soon. The key sectors this fund will invest in include roads, railways, urban infrastructure, renewable energy, agrochemicals, textiles, cement, and automobile.

The fund, which closes on February 19, will mature after three years and six months. To give investors liquidity, the fund will be listed on the National Stock Exchange 15 days after the units are allocated.

Meanwhile, ICICI Prudential's new fund bets on large-cap stocks as it sees high value in these companies will benefit from the economic recovery. “This fund offers a more concentrated view with 15-20 high conviction picks with an aim to benefit from the current opportunity in large cap space," says Manish Gunwani, Deputy CIO-Equity, ICICI Prudential Mutual Fund. The fund closes on February 22 and will mature after three years (1,099 days).

The themes that these funds are looking at are sound and are likely to play out in the long run.

Investment advisors and analysts, however, say that investors are better off looking at alternative open-ended funds rather than close-ended ones.

"The biggest drawback in close-ended fund is the liquidity. An investor cannot exit mid-way,” says Dhaval Kapadia, director — investment advisory at Morningstar Investment Adviser, India. He explains that an investor may need to exit mid-way for several reasons. Say, if the fund doesn't perform as expected or the scheme has made good returns and investors want to cash in or there's a certain view of the investor on the market. 

While Birla Sun Life's new fund offers exit opportunity through listing on stock exchange; the price prevailing after listing will be function of the market. Investor may or may not get the fair value of the units held. 

Open-ended schemes also give investors the flexibility to opt out any time they wish.

Vidya Bala, head of Mutual Fund Research at FundsIndia say that funds with a proven track record, which have see different market cycles, are better than close-ended funds. Both the fund houses are reputed and have open-ended funds with track records in the large as well as small- and mid-cap space that investors can look at.

Kapadia also points out that there's no research anywhere in the world that proves close-ended schemes are better than the open-ended ones or vice versa. Birla Sun Life's earlier funds in the same series have negative returns between 10.21% and 11.52% in the past year. The fund house's other mid and small cap schemes have similar performance.

In case of ICICI Prudential, some of its large cap open-ended funds have given even better returns compared to the close-ended funds launched earlier in the series.

Bala also points that most of the open-ended equity funds are already following the theme that these funds are pursuing. "Many funds are slowly building up stock position in sectors such as auto and cement," Bala says.

Close-ended funds can suit those investors who worry about market volatility and rush to redeem funds on big corrections. "Currently, we believe markets are likely to be volatile, and the compulsion to stay the course makes these funds a good choice for investors and could help them earn reasonable returns at the end of fund's tenure," says Gunwani.

Long term investors should, however, invest through systematic investment plan in an open-ended fund.