Close ended mutual funds in India offer a unique approach to investing with a fixed tenure and limited entry. Unlike open-ended funds, they lock in capital for a set period, appealing to disciplined investors. What are they, and why consider them? Let’s dive in.
What Are Close Ended Mutual Funds?
Close-ended mutual funds in India are investment schemes that raise capital through a New Fund Offer (NFO) and have a fixed maturity period, typically ranging from 3 to 5 years. You can buy or sell the fund’s units on stock exchanges at current market prices. For example, ICICI Prudential Growth Fund Series locks funds until maturity. Investors can only exit via secondary market sales or at maturity.
Benefits: Focused Strategy and Stability
Close ended mutual funds allow managers to execute long-term strategies without redemption pressures. This suits thematic or sector funds, like infrastructure, targeting 12-15% returns, per SEBI data. Fixed capital ensures stability, unlike open-ended funds facing outflows. In addition, limited units can create demand, boosting prices in bullish markets.
Taxation on Gains:
The tax treatment of gains from these mutual funds depends on their asset allocation:
- Equity Funds: If the fund invests at least 65% in equities, short-term capital gains are taxed at 15%, and long-term capital gains above ₹1 lakh are taxed at 10%.
- Debt Funds: If the fund invests at least 65% in debt instruments, STCG is taxed as per the investor’s income tax slab, and LTCG is taxed at 20% with indexation benefits.
Risks and Considerations:
- Market Risk: The value of units can fluctuate based on market conditions, potentially leading to losses.
- Liquidity Risk: Selling units in the secondary market may be challenging if there is low trading volume.
- Discount to NAV: Units may trade at a discount to the NAV, thus affecting the returns on investment.
- Regulatory Changes: Changes in regulations can impact the performance and structure of the fund.
Who Should Invest?
These mutual funds are ideal for investors who have a long-term investment horizo. It is also ideal for those who are comfortable with lump sum investments and do not require regular liquidity. It’s also crucial to read the offer document carefully to understand the fund’s investment strategy, asset allocation, and associated risks.
Conclusion:
Close ended mutual funds in India offer focused growth but demand commitment. While they come with certain limitations, understanding their features and aligning them with your investment goals can lead to informed and beneficial investment decisions. Ready to invest strategically? Explore more fund insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Close Ended Mutual Funds here – https://www.bajajfinserv.in/close-ended