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An open and shut case?

Should you buy closed-end funds? Absolutely not. The right way to invest in a fund is to choose a good fund on the basis of its track record and then invest in it steadily but closed-end funds eliminate the possibility of both

The Indian mutual fund industry has changed for the better in many ways over the last decades and one of the ones I'm personally very happy about is the death of closed-end funds. The reason is that you can invest in closed-end funds only when they launch. This rules out the very possibility of investing in a sensible fashion in them.

However, it seems that I was rejoicing in the demise of closed-end funds too soon. The last few months have seen signs of a strong revival of closed-end funds. In about seven years from January 1999 onwards, there was only one closed-end equity fund launched. In the last seven months, there have been seven. In fact, in the current quarter, there have been three new equity funds and all are closed-end.

Why is this happening? Simply because in open-end funds, SEBI has now made it impossible for fund companies to hide the fact that it is investors who pay for their expensive marketing campaigns. However, the current rules still make it possible for fund companies to fudge this in closed-end funds. So the situation is all set for a grand revival of closed-end funds. It's clear to every fund marketer that in the Indian investor's current light-headed state, he will buy practically any kind of equity fund. So now that the law makes it clear that AMCs have to pay to sell their own open-end funds but can fool investors into paying for closed-end sales campaigns, the choice is clear-the future lies with closed-end funds.

Suddenly, AMCs that have been launching only open-ended funds for years and years (and have actually converted their closed-end funds to open-end in the past) have discovered that closed-end funds are better for long-term investments. Of course, this realization happens to have come to them at just about the same time when the expense-accounting rules for open-end funds became fair to investors. What a coincidence!

Should you buy closed-end funds? Absolutely not. No matter what you think of the fund or the fund-house, do not buy a closed-end fund. The right way to invest in a fund is to choose a good fund on the basis of its track record (and not its marketing hype), and then invest in it steadily. Closed-end funds eliminate the possibility of both. In today's closed-end funds you have to invest all your money in one go and you have to invest not on the basis of any track-record but only of hype.

Over the past decade, there have been plenty of well-run open-end funds that have proven beyond doubt that a good fund manager does not need the fake long-term perspective that closed-end funds supposedly provide. In any case, most of the closed-end funds that are being launched now provide periodic exit for investors. This shows that the real reason for this sudden rediscovery of closed-end funds are the new expense accounting rules.

So if a fund salesman approaches you and pitches a closed-end fund, just say no. Loudly and firmly.