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Open-Ended Funds Better

You advise open-ended funds are better than close-ended funds. Are ELSS funds close-ended with their three-year lock-in period? I want to invest in HDFC Tax Saver and HDFC LT Advantage

I understand you advise open-ended funds are better than close-ended funds for investors. Are ELSS funds considered close-ended with their three-year lock-in period? I have an investment horizon of 8-10 years without any redemption need. I am thinking to invest in HDFC Tax Saver and HDFC Long-Term Advantage Funds through SIP. With their small and stable corpus, I feel they can perform better than HDFC Equity Fund (an open-ended fund) over longer time period. What do you say?
-Dr Prasad Surapaneni

A true close-ended fund is the one in which there cannot be any inflows or outflows during the pre-specified tenure of the fund (though it may be listed on a stock exchange to provide liquidity). Therefore, a fund manager is in a position to manage the fund better as he does not have to worry about sudden redemptions and can choose and invest even in relatively less liquid stocks.

But the funds widely sold as 'close-ended' these days are not truly closed. Most of them provide intermittent liquidity and you can exit them on a quarterly or half-yearly frequency. Such a structure is quite detrimental to investor's interests. Firstly, there is no advantage in terms of the fund manager being able to manage more efficiently, since there can be intermittent redemptions. And secondly, because they are open only for a limited period of time, you can only make a lump sum investment rather than an SIP. That is why open-end funds are structurally much better since you can at least invest through SIP and average out your unit cost. A majority of ELSS in existence today are not close-ended. You can invest in them any time. Moreover, redemption is also available on a daily basis. The three-year lock-in period differs from investor to investor, but the scheme as such is not close-ended.

We think you should invest in an ELSS to the point it provides you with tax benefits. For the remaining you can get plenty of compelling options in the category of diversified equity funds. Moreover, the corpus of ELSS funds is not all that stable, but has been growing in leaps and bounds. To illustrate, the size of HDFC Taxsaver has grown to around 10 times during past year-and-a-half from Rs 89 crore crore to Rs 826 crore. !

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