Closed-end mutual funds - what are they and should you invest in them?
The development of the brokerage infrastructure after the strongest post-COVID crisis in the market led to the development of investment and the study of financial instruments. Closed-end mutual funds (ZPIF) are considered one of the most interesting and profitable ones. Is it worth investing in them and what risks should be kept in mind?
Closed-end mutual funds are a financial market instrument focused on the organization and implementation of projects involving investments on a long-term basis through a licensed management company. With a closed version of the fund, the property belongs to the owners of the shares on the basis of common shared ownership.
Investing in mutual funds is suitable for those investors who want to get a profitable portfolio, collected by a professional management company or financial intermediary.
The difference between closed mutual funds and other types of funds
Unlike open-ended and exchange-traded funds, a feature of closed mutual funds is investing in risky, but highly liquid assets. Among the features of the closed-end investment fund, it is also necessary to highlight:
- In a closed-end fund, the number of units offered to investors is limited and they are often sold by the management company at the stage of fund formation.
- A closed-end fund allows you to invest in a wider range of financial instruments.
- ZPIF specializes in long-term investments (from 3 to 15 years with the possibility of extension) and the implementation of project activities. For example, in construction, purchase of retail space and office centers for further extraction of regular income.
- The cost of a share and the minimum contribution when entering a closed-end mutual fund are often very high.
- When entering a closed mutual fund, preference is given to experienced and qualified investors with large capital.
During the implementation of the project work of the fund, shareholders receive dividends or intermediate income. Before closing, the management company sells the existing assets and makes settlements with the owners of the shares.
Entry of an unqualified investor into closed-end mutual funds
Despite the complexity and high entry threshold, you can try to enter a closed-end fund for an unqualified investor:
- At the stage of carrying out the first or second level of listing. At this point, they are still not so expensive and there are no high requirements for potential investors.
- After testing, which helps to identify the quality of knowledge of a potential investor about financial instruments and closed-end mutual funds, theoretical and practical experience in the market. To do this, you will have to enlist the support of a professional broker or management company.
- During the issue of additional units.
The assets available to an unqualified investor are concentrated around the following areas:
- shares of open mutual funds;
- capital on accounts;
- funds in deposits;
- assets that are offered on the exchange;
- real estate.
Principles for choosing a unit of a closed-end mutual fund
Information about mutual funds is in the official registers of the country, which indicates that the fund has been registered and operates in the legislative field.
When choosing a fund, you need to pay attention to the parameters:
- The period of existence and activity of the fund.
- Fund closing date.
- Selection of assets. For example, not all funds have securities of foreign companies in their arsenal.
- Availability of a fund passport with detailed information about the activities of closed-end investment funds.
- Share value dynamics. When evaluating, it is important to take into account that the performance and high profitability for the previous reporting period are not an absolute guarantee of the profitability of the unit in the future.
- The amount of commissions and remuneration of the management company or intermediary when making a trade transaction (indicated in the fund's passport).
- The amount of tax payments from income from the deposit.
- The opportunity to receive a tax deduction if the share is registered through an individual investment account (ISS).
If an investor works independently and acquires a share through intermediaries, then first of all he should be interested in the license of the management company and broker, and secondly, customer reviews and ratings in the financial services market.
Sale and redemption of a share
You can earn on shares, just like on securities. Standard speculative scheme: buying a share when it gets cheaper and selling when it gets more expensive. Also, the shareholder has the opportunity to redeem his share and receive monetary compensation from the management company or part of the fund's property. Investments in closed-end mutual funds are justified only if the investor understands the principle of the instrument and knows how to use it correctly.
Risks of investing in closed mutual funds
By investing in mutual funds, no one can guarantee the investor profitability and return of funds in case of an unsuccessful strategy. All risks lie only on the depositor. In addition, unlike deposits, investments are not insured by the state.
Many factors influence the profitability and successful investment activity of funds:
- management experience;
- the number of funds under the management of the company;
- market factors, such as demand for real estate;
- the state of the internal and external economy;
- geopolitical situation;
- rates of national and international currencies;
- devaluation and inflation;
- quotes for raw materials and much more.
Experts recommend taking into account the rules of diversification when investing. For example, it is not worth transferring all free funds only to highly liquid securities of IT companies or real estate. There should be different assets in the share, it will not be superfluous to take a closer look at the shares of oil and pharmaceutical companies. When one of the directions draws down, you can always swim out at the expense of the other and stay in the black.
ZPIF is a universal financial instrument that, with the professional and competent work of the management company, can bring high profits to the investor.