Should you buy NFO's or stick to existing ELSS Schemes?

The closed-end NFOs indicate that there are neither inflows nor outflows in the scheme during the lock-in period.

Dec 30, 2014 09:12 IST India Infoline News Service

It is better to stick to existing ELSS schemes compared to closed-end NFOs. The answer for why is mentioned in the reasons below:
 
No fresh inflows
 
The closed-end NFOs indicate that there are neither inflows nor outflows in the scheme during the lock-in period. Even after the completion of the lock-in period of three years, the investors can just redeem their units. The investors cannot make any fresh investment in the scheme. In the absence of fresh inflows, the fund managers cannot take new positions. It is a problematic situation for the fund manager as there is no option to average out costs. The only benefit with the fund managers is that they have liquidity for three years.
 
No option of SIPs
 
Investors don't have the option to invest through systematic investment plans in closed-end NFOs. It is the other way round in open-end ELSS schemes. The investors can invest through SIPs in open-end ELSS schemes. The SIPs comes with a lock-in period for three years. The investors also get the benefit of tax relief under Section 80C. SIPs make open-end ELSS schemes a better option over closed-end NFOs as SIPs are based on the concept of “rupee cost averaging." It implies investors get more units when NAV of the scheme is low, and vice-versa.
 
Proven record
 
Existing funds have a proven record of success in the industry. The investors can analysis the past returns and evaluate the performance of schemes in different market cycles. It helps them to decide which scheme will best suit in their investment portfolio. As of now, there are 37 open-ended ELSS compared to 12 closed-end ELSS in the industry. According to an MF tracker, the ELSS have outperformed the closed-end group funds by anywhere between 1.4%- 2.3% over one, three and five- year periods
 
Fund size
 
The closed-end NFOs have small fund size and, therefore, the schemes are associated with higher costs. The total expense ratio of closed-end varies between 2.5% to 2.7% compared to 2% to 2.2% expense ratio in an open-ended scheme. 

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