Close ended funds

Close ended equity funds have caught frenzy due to the current market euphoria. Over 27 schemes were launched in the last 9 months mobilizing Rs 4400 crores. By definition, a close ended fund can be bought ONLY during the NFO (New Fund Offer) period. Post; the unit gets listed on the stock exchanges for the purpose of liquidity. 

Unlike an open ended fund, the fund house do not provide window for on- going sale and re purchase of units. Ideal, if you’re willing to commit your money for a defined period.

What is the justification for close ended funds? The proponents point to the following:

• Brings a forced discipline
• Need for funds with a longer horizon, free from the worry of sudden inflow - outflow
• Fund manager shall take concentrated positions in stocks / sectors without pressure on short term performance
• Availability of good quality companies with sustainable business models & proven track record
• Larger bias towards midcap stocks

 Let’s take a look at the performance of ELSS (Equity Linked Tax Saving Schemes) that has similar characteristics (3 year lock in ) visa vie the open ended small & mid cap schemes:

Small & Mid cap Funds	3 Year Return	ELSS Category	3 Year Return	Performance diff
Reliance small cap	27.50%	Reliance Tax saver	24.40%	-3.10%
Birla pure value	25.40%	Birla Tax plan	17.90%	-7.50%
I Pru mid cap	23%	I Pru tax plan	22%	-1.00%
UTI Midcap	25.20%	UTI L.T Adv	16%	-9.20%
DSP Microcap	23.10%	DSP elss	20.50%	-2.60%
Franklin small cos	29.80%	Franklin elss	19.10%	-10.70%
I Pru discovery	27.50%	I Pru tax plan	22%	-5.50%
Religare Mid cap	21.80%	Religare elss	18.60%	-3.20%
HDFC Midcap opp	22.80%	HDFC  Elss	17.40%	-5.40%
L&T Midcap	21.80%	L&T elss	13.90%	-7.90%
Axis Midcap	25.20%	Axis elss	25.20%	0.00%
Kotak midcap	17.90%	Kotak elss	13.50%	-4.40%
SBI Magnum midcap	24.80%	SBI elss	20.20%	-4.60%
Source : Moneycontrol
CAGR returns as on 14th august 2014

It is ironical to note that most of them have underperformed their own open ended schemes for a similar period. In the absence of any distinct advantage, Investors are better off in an open ended fund that provides stable & consistent performance, liquidity accompanied by low volatility.

Happy investing!

Disclaimer: Views are personal.No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments