Be Open To Closed-End Mutual Funds

Closed-end mutual fund schemes available at a discount are a good investment option, but be prepared to dig in for the long haul

- Kundan Kishore

If you are an investor looking for products at a discount, your search might lead you to closed-end mutual funds at stock exchanges. Many of them are trading in the secondary market at prices far below their net asset value (NAV). Here’s how it all works and some wisdom gleaned from portfolio managers and other market experts.

Broadly, MFs are of two types—open-ended and closed-end—as per their structure. Open-ended MF schemes allow you to invest and exit at any point of time whereas closed-end schemes can be bought from the fund house only at the time of launch. And one is allowed to exit after the lock-in period, which varies. In order to ensure liquidity, these schemes are required to be listed on stock exchanges so that investors can buy and sell them from the secondary market. However, such funds are thinly traded on stock exchanges and, therefore, offered at discounted prices to their NAV. For instance, the NAV of Axis Equity Advantage Fund Series-1 Regular Plan (Growth) was Rs 11.04 as on October 1, but the last traded price on the Bombay Stock Exchange (BSE) was Rs 9.38 that day. This means the scheme is trading at 15 per cent discount to its NAV. There are several other closed-end equity schemes trading at discounted prices.

A DONE DEAL?