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Equity mutual funds are making the most of the ongoing ‘hope rally’ and garnering huge inflows. Fair enough. But a good proportion of this is from close-ended funds, which are not exactly investor-friendly. The market, industry grandees say, is set for a multi-year bull run, and close-ended funds will give retail investors a ‘good return experience’. Pray, why close-ended funds which have a lock-in and not open-ended funds which allow investors to enter and exit at will? The retail investor, it seems, tends to head for the exit door at the first sign of the market retreating. Result: she loses out on the benefits of long-term investing. Enter the close-ended fund — it locks in the investment for three or five years and bestows on the ignorant investor the boons of being patient.
No quarrel with the diagnosis (that long-term investing is essential), but the medicine (fixed lock-in period) prescribed is poppycock. Units in a close-ended fund have to be redeemed or switched to another fund on the maturity date. This means that the investor has to take what she gets. What’s the guarantee that on the maturity date a few years later the fund’s value will not be lower? Even with a great stock portfolio, the fund could be in the red, simply because the market, unpredictable as it is, is down. An open-ended fund can recoup when the tide turns. Not so a close-ended fund which packs up on the pre-determined date. Investors could end up disillusioned and permanently keep away from the market — hardly the desired happy ending.
Long-term investing, in the true sense, is provided by open-ended funds. Even if close-ended funds provide a switch option, the question is, why not go for an open-ended fund in the first place? Open-ended funds with a similar theme and good track record offer a superior alternative to close-ended new fund offers which start from scratch.
The mutual fund industry would do well to increase investor awareness about the importance of staying invested for the long-term in well-run open-ended funds.
Chief Research Analyst
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