Is open end fund better than closed end funds or vice versa

Investment experts are split in their opinion whether open end funds give higher returns than their closed end counterparts or vice versa. In our opinion it is difficult to generalize whether open end funds are better than closed end funds or vice versa. The performance of a fund, whether open ended or closed ended, depends on the fund management, investment style and the fund category. It also depends on the holding period and market conditions. It is not correct to compare the performance of closed end funds versus open end funds based on the short term returns. Some investment experts argue that because there is no redemption pressure in closed funds, there is no incentive for their fund managers to actively manage their portfolio. They cite last one year trailing returns to argue that open end funds are better than closed end funds. But such comparison is meaningless because the minimum investment horizon in closed end funds have a much longer horizon than a year. In fact, over a sufficiently long investment horizon, good closed end funds have done as well as their open end counterparts. Take the ICICI Prudential R.I.G.H.T a closed end ELSS fund. Over a three year time horizon the fund has given 33% annualized returns and done as well as the best performing open end ELSS funds
Some investment experts argue that one should invest in equities only with a long time horizon. What difference does it make to an investor with a long time horizon, whether he or she invests in closed end fund or an open end fund? There is merit in this logic. However, investor behaviour in certain cases makes closed end funds a better choice. Take small and midcap funds as example. Small and midcap stocks are more volatile than their large cap counterparts. These stocks are also less liquid. Small and midcap stock prices rise very quickly in bull markets. Some open end fund investors are quick to redeem their units after the NAV appreciates by 5 – 10% to book short term profits. This hurts the investors who remain invested in the funds. Closed end funds are better options in such situations because the lock – in period prevents early redemptions and protects the interest of long term investors.