How are closed end funds taxed?

Closed ended funds are taxed like any other mutual fund, depending on the asset class they belong to.

1. Equity Close Ended Funds:
   1. Almost all close ended funds have a duration of 3 or 5 years. This makes them all come under the ambit of long term capital gains.
   2. The gains are taxed at 10% calculated from 31 January 2018 (also called ‘Grand Fathering’) since the rules were changed then.
   3. The first one lakh is exempt in each financial year.
2. Debt Close Ended Funds:
   1. These are usually for a minimum of three years. Many are actually called Fixed Maturity Plans (FMPs).
   2. Here the gain is indexed against inflation. The reduced gain is then taxed at 20%.

Are close ended funds good?

In general, it is advisable to avoid them due to:

1. High commission structure.
2. Besides you lose flexibility to shift into another fund if this fund is doing badly.
3. Some close ended funds may be misused as dumping ground for poor performing stocks/bonds so tha the fund house’s other funds (flagship) look better.