Mutual funds are great investment vehicles when one wants to
fight inflation and gains some money out of different markets. Mutual funds let you gain much money while
also diversifying your portfolio, therefore minimizing the risks you have to withstand. And since there is currently a high demand for
mutual funds, very efficient funds are now declaring themselves as close-ended mutual
funds.
Close-ended mutual funds are those that serve only to a
limited set of investors. And because of
this, close-ended mutual funds raise the capital only through initial public
offerings or IPOs.
In this article, we’ll discuss the most important things you
need to know about close-ended mutual funds.
Check them out below!
Advantages
More and more investors are now choosing close-ended mutual
funds because of the following advantages it brings:
Portfolio Management
Closed-ended mutual funds provide professional fund managers
who are tasked to efficiently manage your funds.
And because the volume is already predetermined, the funds don’t
typically experience unnecessary disruptions and mismanagement.
Stable Securities
Close-ended funds are laid out and planned in advance. And because of that, the number of shares and
the securities that are to be invested in are predetermined as well.
Dividend Reinvestment Plans (DRIPs)
Closed-ended mutual funds usually have the feature of
dividend reinvestment plans, in which the dividend received from the investments
is further reinvested to grow the investment value.
This helps a lot when it comes to compounding the investment
and results in a much higher Net Asset Value of the investment, especially for
the long term.
Market Panic-Resistant
Investors of closed-ended mutual funds do not usually sell
their shares in panic because of low liquidity.
This makes it a plus point when it comes to achieving stability as this quality
does not let redemption pressure to come overhead.
Things to Consider
If you’re planning to invest in closed-ended mutual funds
anytime soon, you have to be aware of a number of things. You might want to do the following:
Analyze the Portfolio
There is really no past history or real-time analysis of the
fund since it’s declared and available only during the IPO. What
this means is that you have to completely depend on your analysis of the portfolio.
Before you make any kind of decision, you need to make sure
that the portfolio you have chosen sports all the right set of securities for a
better return on investment.
Think about Liquidity
Closed-ended mutual funds provide low liquidity. In essence, this means that you don’t have
the choice to exit anytime. In order for you to sell a closed-ended mutual
fund prior to maturity, you will have to sell it on the stock exchange.
This means you should ensure you can afford to fix your
funds for a longer-duration.
No Systematic Investment Plan
If you don’t have huge funds to invest and you want to avail
a systematic investment plan, you would want to reconsider your plan to invest in
closed-ended mutual funds.
Closed-ended mutual funds do not provide the option of SIP. That means you have to invest whatever amount
you have in one go during the IPO declaration.
Conclusion
Closed-ended mutual funds are very viable options for those
who want to ride on an investment vehicle to make profits. However, prudence and carefulness are still
very necessary if you want to make the best out of it.
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