Open up with the closed ended funds!!!!

A think piece on mutual funds
Open up with close-ended funds!!!

1. What should be an apt strategy when the markets are volatile as in the
present scenario?
During the last three years, markets have become more efficient and PE levels which were very low, have moved upwards.
As a result, now it has become less probable to realize abnormal gains in short term. Also, domestic markets have started
exhibiting higher correlation with international markets and this is expected to become a constant feature of the market.
This has resulted in higher volatility.
Owing to the above factors, the right approach in equity market is to stay invested for a long term as it has been a
proven fact that volatility decreases with the increase in time horizon.
The benefit of long-term investment: Investment in equities should be done for long term to capture their growth trend
and increase the possibility of positive returns (Refer table below).
2. What are the options available if I want to invest in mutual funds f o r l o n g
term?
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Holding period (in years) % of negative occurrences % of positive occurrences
1 38.5 61.5
2 27.0 73.0
3 21.4 78.6
4 20.2 79.8
5 16.1 83.9
6 14.9 85.1
7 15.4 84.6
8 12.0 88.0
9 8.0 92.0
10 2.4 97.6
Time period: 1986-2006 Daily rolling returns are computed Study has been done on Sensex values
Possible categories available for investment in mutual funds:
Can invest and redeem from the fund at any point of time Can invest only during the offer period and redeem
when liquidity window is provided
No lock-in period for investments There is a lock-in period during which units can
not be redeemed
Can invest in lump sum or periodically through SIP Invest in lump sum; no SIP
Open-ended funds Close ended funds
FAQs


3
Fund-o-Meter-Concept Note
A think piece on mutual funds
Open up with close-ended funds!!!
PF / MFC / 140906/ 044 September 14 '06
Call us on : 1800 425 82 83
3. Why should I consider investing in a close-ended fund and blocking
my money for the said lock-in period ?
While open-ended funds offer high liquidity, close-ended funds facilitate a committed and disciplined approach of
investment. Both investment avenues are positioned for different set of needs. Hence if you are looking for a long term
investment avenue which is less impacted by short term market movements in terms of redemption pressure from
investors, close-ended funds are the perfect choice.
4. I am 40 years old and work for a software firm. I have made significant
contribution in SIP of an open-ended fund 2 years back. At present I have
enough surpluses and want to invest in mutual funds. Will close-ended
funds be suitable for me ?
An ideal portfolio should be a good blend of return and liquidity. Investment in open-ended funds offers high liquidity. At
the same time, close-ended funds have the potential of generating higher returns, at the cost of liquidity (refer Three Aces:
Achieve disciplined investment). An optimum balance of return and liquidity can be achieved by going for a combination of
both classes of funds. Since you have surplus wealth, you can invest in a close-ended fund for long term and fetch higher
returns. SIP Investment in open-ended fund will offer you the necessary liquidity.
Three Aces!!!
Achieve disciplined investment:
Add a low cost fund to your portfolio :
Avoid entry load :
In case of open-ended funds, large number of investors may try to redeem their units in
the event of a negative market cycle. Such large scale redemptions would force the fund managers to exit their investment
positions at a lower market value, in order to repay the investors. Therefore the NAV goes down on the back of two factors:
market downfall and high outflow from the fund. High inflow into the fund in a bullish market is another factor that may
disturb the selection and positioning of appropriate stocks in the portfolio.
In case of close-ended funds, the quantum of funds under management is fixed for the specified tenure. The redemption
pressure is significantly low, which keeps the fund insulated from liquidation of stocks in a downturn. As a result, in the
event of a negative market cycle, the drop in the NAV is due to the market downfall only. Further, the fund manager is free to
take a medium to long term investment strategy on account of fixed corpus.
Close-ended funds have low portfolio turnover and this is passed on to investors
in terms of lower cost and expense ratio.
Close-ended funds, unlike open-ended funds do not charge any entry load. However, an exit load
equivalent to the unamortized expenses is charged if an investor redeems before the maturity period of the scheme. Hence,
if an investor invests in the close-ended fund till its maturity, he can avoid both entry and exit load and thereby realize higher
returns.