Closed Ended Funds: Meaning, Features, and Taxation

Closed Ended Funds: Meaning, Features, and Taxation

Introduction:

Mutual funds come in various structures, with open-ended, closed-ended, and interval funds being key categories. Understanding the differences between these structures is essential for informed investing.

While open-ended funds are widely popular for their flexibility, closed-ended funds offer unique advantages worth exploring. In this guide, we will delve into the world of closed-ended mutual Funds, examining the types available in India, their benefits, and more.

What are Closed Ended Funds?

Closed Ended Funds are a distinct type of equity or debt fund with a fixed number of units issued at launch. Once the New Fund Offer (NFO) period concludes, investors cannot buy or redeem units until the fund matures. These funds are traded on the stock market, similar to stocks, and have a predetermined maturity date.

The market price of closed-ended funds can vary based on supply and demand, deviating from the Net Asset Value (NAV) over time. In essence, a closed-ended fund "closes" after the NFO period until maturity, giving fund managers more freedom to pursue their investment goals.

Advantages of Closed-Ended Mutual Funds:

  • Stability for Fund Managers: The lack of redemptions before maturity gives fund managers a stable asset base to formulate strategic investment plans.

  • Market Price Based on Demand and Supply: Like stocks, closed-ended fund units are traded on stock exchanges, with prices influenced by unit supply and demand. This can lead to units selling above the NAV when demand outstrips supply.

  • Not Illiquid: Despite initial appearances, closed-ended funds offer liquidity through stock exchange trading, enabling investors to buy or sell units at market prices.

Disadvantages of Closed-Ended Mutual Funds:

  • Past Performance: While fund managers have leeway to create investment strategies, historical data suggests that closed-ended funds haven't consistently outperformed open-ended schemes.

  • Lump Sum Investment: Investors must make lump-sum investments during the initial NFO period, which carries a higher risk than systematic investment plans (SIPs).

  • Fund Manager-Driven: Closed-ended fund performance heavily relies on fund manager decisions, and historical market data over different cycles is often unavailable.

Who Should Invest in Closed-Ended Mutual Funds?

Closed-ended funds are suitable for investors with a lump sum to invest and an investment horizon aligned with the fund's maturity date. It's crucial to evaluate risks and returns based on the fund's asset allocation as outlined in the offer document.

Tax on Gains:

Taxation of Closed Mutual Funds varies based on the fund's asset allocation. Funds investing 65% or more in equity are treated as equity funds for tax purposes, while those allocating at least 65% to debt instruments are treated as debt funds. Detailed tax rates can be found in the offer document.

How to Invest in Closed-Ended Funds?

Investors can choose to invest directly with the asset management company (AMC) or through agents and distributors. Opting for direct plans yields more units as no distributor commission is involved.

Alternatively, investors can subscribe to closed-ended funds online via the official website of the mutual fund company.

List of Closed-Ended Funds in India

(Based on Five-Year Performance):

SBI Tax Advantage Fund – Series III – Regular Plan:

  • 1 year: 2.61%

  • 3 years: 9.60%

  • 5 years: 13.02%

ICICI Prudential Growth Fund – Series 2:

  • 1 year: 3.31%

  • 3 years: 10.98%

  • 5 years: 12.99%

SBI Tax Advantage Fund – Series II:

  • 1 year: 2.26%

  • 3 years: 9.68%

  • 5 years: 12.88%

ICICI Prudential Growth Fund – Series 1:

  • 1 year: 4.39%

  • 3 years: 9.08%

  • 5 years: 11.83%

ICICI Prudential R.I.G.H.T. Fund:

  • 1 year: -12.14%

  • 3 years: 6.99%

  • 5 years: 10.00%

Reliance FHF XXV Series 15:

  • 1 year: 8.28%

  • 3 years: 8.38%

  • 5 years: 9.00%

HDFC FMP 793D Feb 2014 (1) Reg:

  • 1 year: 8.97%

  • 3 years: 7.32%

  • 5 years: 8.42%

These are the returns for the specified time periods for each of the mentioned closed-ended funds.

Note: This list is provided for reference and does not constitute a recommendation. Please consider your investment objectives and risk profile before investing

Introduction:

Mutual funds come in various structures, with open-ended, closed-ended, and interval funds being key categories. Understanding the differences between these structures is essential for informed investing.

While open-ended funds are widely popular for their flexibility, closed-ended funds offer unique advantages worth exploring. In this guide, we will delve into the world of closed-ended mutual Funds, examining the types available in India, their benefits, and more.

What are Closed Ended Funds?

Closed Ended Funds are a distinct type of equity or debt fund with a fixed number of units issued at launch. Once the New Fund Offer (NFO) period concludes, investors cannot buy or redeem units until the fund matures. These funds are traded on the stock market, similar to stocks, and have a predetermined maturity date.

The market price of closed-ended funds can vary based on supply and demand, deviating from the Net Asset Value (NAV) over time. In essence, a closed-ended fund "closes" after the NFO period until maturity, giving fund managers more freedom to pursue their investment goals.

Advantages of Closed-Ended Mutual Funds:

  • Stability for Fund Managers: The lack of redemptions before maturity gives fund managers a stable asset base to formulate strategic investment plans.

  • Market Price Based on Demand and Supply: Like stocks, closed-ended fund units are traded on stock exchanges, with prices influenced by unit supply and demand. This can lead to units selling above the NAV when demand outstrips supply.

  • Not Illiquid: Despite initial appearances, closed-ended funds offer liquidity through stock exchange trading, enabling investors to buy or sell units at market prices.

Disadvantages of Closed-Ended Mutual Funds:

  • Past Performance: While fund managers have leeway to create investment strategies, historical data suggests that closed-ended funds haven't consistently outperformed open-ended schemes.

  • Lump Sum Investment: Investors must make lump-sum investments during the initial NFO period, which carries a higher risk than systematic investment plans (SIPs).

  • Fund Manager-Driven: Closed-ended fund performance heavily relies on fund manager decisions, and historical market data over different cycles is often unavailable.

Who Should Invest in Closed-Ended Mutual Funds?

Closed-ended funds are suitable for investors with a lump sum to invest and an investment horizon aligned with the fund's maturity date. It's crucial to evaluate risks and returns based on the fund's asset allocation as outlined in the offer document.

Tax on Gains:

Taxation of Closed Mutual Funds varies based on the fund's asset allocation. Funds investing 65% or more in equity are treated as equity funds for tax purposes, while those allocating at least 65% to debt instruments are treated as debt funds. Detailed tax rates can be found in the offer document.

How to Invest in Closed-Ended Funds?

Investors can choose to invest directly with the asset management company (AMC) or through agents and distributors. Opting for direct plans yields more units as no distributor commission is involved.

Alternatively, investors can subscribe to closed-ended funds online via the official website of the mutual fund company.

List of Closed-Ended Funds in India

(Based on Five-Year Performance):

SBI Tax Advantage Fund – Series III – Regular Plan:

  • 1 year: 2.61%

  • 3 years: 9.60%

  • 5 years: 13.02%

ICICI Prudential Growth Fund – Series 2:

  • 1 year: 3.31%

  • 3 years: 10.98%

  • 5 years: 12.99%

SBI Tax Advantage Fund – Series II:

  • 1 year: 2.26%

  • 3 years: 9.68%

  • 5 years: 12.88%

ICICI Prudential Growth Fund – Series 1:

  • 1 year: 4.39%

  • 3 years: 9.08%

  • 5 years: 11.83%

ICICI Prudential R.I.G.H.T. Fund:

  • 1 year: -12.14%

  • 3 years: 6.99%

  • 5 years: 10.00%

Reliance FHF XXV Series 15:

  • 1 year: 8.28%

  • 3 years: 8.38%

  • 5 years: 9.00%

HDFC FMP 793D Feb 2014 (1) Reg:

  • 1 year: 8.97%

  • 3 years: 7.32%

  • 5 years: 8.42%

These are the returns for the specified time periods for each of the mentioned closed-ended funds.

Note: This list is provided for reference and does not constitute a recommendation. Please consider your investment objectives and risk profile before investing

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