Pros and cons of closed-ended fixed income mutual funds

Being a mutual fund investor, if you are looking at the closed-ended fixed income mutual funds as the investment avenue you must know some pros and cons of these mutual funds.

Pros

Low volatility

The fluctuation of the NAV which is usually observed in the open-ended debt funds is not too dominant in the FMP. FMP holds the instruments till maturity and ensures the accrual of the interest. Also, these funds have lower portfolio churns due to which it enjoys a lower volatility.

Indexation benefit

These funds enjoy indexation benefits for the holding more than the 3-year maturity with long-term capital gain tax owing to which tax outgo lowers which in turn improves the post-tax return.

Cons

No exit route

Having no exit route is the general risk factor for all the closed-end funds. In these funds, the investment of the investor is locked-in for the tenure of the scheme with limited opportunity to exit in between.

No guarantees

These funds are a bit riskier than that of the fixed deposits. These funds don’t come up with any insurance on the investment so default or delay in payments from the underlying paper can affect the return very significantly. So one must gather good knowledge before investing in these funds. For this Scheme Information Document can be one of the best sources to get insight on the fund.