How closed-ended funds stack up against open-ended MFs?

It is often argued that closed-ended funds give better returns or it should be giving better returns as it allows the fund manager to take calls without bothering about the volatility in inflows. This allows him to have efficient portfolio management to generate optimum returns as they have a stable pool of capital. Although the units of closed-ended funds are traded in exchanges, no asset is flowing in or out of the fund. Therefore, closed-end fund managers can put capital to work with a long-term strategy, without worrying about liquidity to pay back investors who may suddenly redeem shares. This may lead to superior investment results. Another layer of outperformance is added by comparatively lower expense ratio as to open-ended mutual funds. 
 
Despite all the benefits that a closed-ended fund enjoys, empirical analysis shows that they have underperformed their open-ended counterpart. We have analysed more than 1,000 funds including closed-ended and open-ended along with their variants and found that barring Large-Cap category, the closed-ended fund has underperformed their open-ended counterpart in every other category.
 
 
Performance comparison of open-ended and closed-ended mutual funds.
 

 
 













The reason for such outperformance of open equity fund might be because they are managed by better-experienced managers as it constantly remains in the view of investors and hence should be managed in a better way. Besides, the timing of the launch of closed-ended funds also plays a crucial role in deterring their performance.
 
As an investor, you can opt for closed-ended funds when markets are trading lower compared to their historical valuation as this might help fund managers to pick stocks at a lower valuation and the stocks may appreciate at the time of redemption.