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Closed-ended schemes for wealth creation

The mutual fund industry has moved away from closed-ended products because they have a long list of disadvantages over open-ended schemes

There has been so much talk of long term investment in diversified equity funds. Is not possible for an AMC to create a product with 10-15 years lock-in period? They could then market it as an almost sure shot recipe of wealth generation.
- Girish Sidana

Yes, AMCs can create a product with 10-15 year lock-in period. Such products are called closed-ended schemes. There were many closed-ended schemes available in the market in the past. Even in 2014, mutual funds launched a large number of closed-ended schemes. However, the industry has moved away from closed-ended products because these schemes have a long list of disadvantages over open ended schemes. One, you have to invest money in a lumpsum in a closed-ended scheme. That means you cannot invest in them via a Systematic Investment Plan (SIP). Two, you don't have any track record of the scheme you are going to invest, and you have to invest the money in an NFO. Three, it is tough to get out these schemes even if they are underperforming. Even if they are listed, you will have to get out at a discount to the NAV of the scheme because there won't be many takers for them in the secondary market. These are the reasons why fund houses have shifted towards open-ended schemes and started discouraging early exit from them by charging a higher exit load on early redemptions before a fixed period.

For more, read: The Unfortunate Revival of Closed-end funds.

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