Taking advantage of the market rally in the last 12 months, AMCs have brought out more than 30 closed end NFOs hard selling these through distributors by paying them super commissions. Commissions paid could be up to 7%, depending on the bargaining power of the distributors selling!! Yes 7%. Read this article in the Mint.
Unsuspecting investors do not even know that they are being sold the same stuff already available. Even a cursory look at the NFOs in the last year show that many are small and mid cap NFOs, diversified equity fund NFOs by AMCs which have performing open-ended schemes of the same class. Most of the time these come as a series of Funds of the same type launched by AMCs.
I give my reasons why I do not like closed end NFOs.
1. You are timing the market
By investing into a closed end NFO, you are basically timing the market. You are jumping in assuming the market will go up. See the below chart and the huge run-up in the last one year. A gain of almost 40%. This is being hard sold to you. Do you feel that the next 3 or 5 years (duration of the closed ended fund) will give you sustained positive results. If you really believe that this will be maintained, do go ahead and invest. Otherwise, you will end up once again being disappointed.
If things do not play out as expected and markets have soured at the time of redemption of the fund, you returns may be meagre or you may even incur a loss!!
2. You are investing a lumpsum for a short period! Wise huh?
It is clear that you are investing a lumpsum. Is this wise?? Is it part of a financial plan you have thought through. Closed ended funds are for 3-5 years generally. Is this a long term period? We have been reading the benefits of investing through SIP. The lay investor is far better off investing through SIP. Understand the risk in investing through lump sums.
3. You are stuck and cannot re-balance
You simply cannot re-balance or redeem if the market shoots up and you wish to re-allocate as part of portfolio re-allocation. Planners ask their clients to review and do a half yearly / yearly re-balancing as per their desired asset allocation. You may have to redeem a good open ended fund if you are rebalancing and be stuck in a closed ended fund.
4. You are being hard sold funds with no track record
Be wary of hard selling. Mutual funds did not sense any such opportunity in 2012 and nobody was launching closed end funds then. Valuations across all market caps were attractive then!!
Even now, you must have noted that some fund houses have stopped accepting large lumpsum applications in small cap funds. On the other hand, some others keep coming with a series of such closed ended funds! Just be aware!
I stay away from these NFOs!
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