What are Closed-Ended Mutual Funds?
Mutual funds are generally classified into three types based on how investors can buy and sell units:
- Open-ended funds
- Closed-ended funds
- Interval funds
Among these, open-ended funds are the most commonly preferred as they allow easy entry and exit at any time. However, Closed-Ended Mutual Funds are gradually gaining popularity, especially among long-term investors looking for disciplined investing. In this blog, we’ll explore the Closed Ended Mutual Fund Meaning, how these funds work, and the key advantages and disadvantages of investing in them.
What is a Closed-Ended Fund?
A closed-ended mutual fund is a type of fund where the number of units is fixed from the start. You can only invest during the NFO (New Fund Offer) period. After that, you can’t buy or redeem the units directly from the fund house. However, you can trade these units on the stock exchange like shares. These funds also have a fixed maturity period (like 3 or 5 years).
Note: The price you pay on the stock exchange might be more or less than the actual value (NAV) of the fund, based on market demand and supply.
Advantages of Closed-Ended Mutual Funds:
Here’s why some investors like closed-ended funds:
- Stable for Fund Managers: Since no one can pull money out until maturity, fund managers don’t worry about redemptions. They can stick to a long-term strategy.
- Units Traded Like Shares: You can sell your units on the stock exchange. If more people want to buy the fund, the price might go above the NAV.
- Liquidity Through Exchanges: Even though you can’t redeem from the fund directly, you can sell your units anytime on the exchange.
Disadvantages of Closed-Ended Funds:
Here are some reasons you might want to avoid them:
- Lower Past Performance: Closed-ended funds haven’t performed better than open-ended funds in most cases.
- Lump Sum Investment Only: You have to invest all at once during the NFO. There’s no SIP option, which makes it riskier.
- Depends Heavily on Fund Manager: These funds are harder to track since they don’t have long performance records. The success depends a lot on how good the fund manager is.
Who Should Invest in Closed-Ended Funds?
You should consider investing in a closed-ended fund if:
- You have a lump sum amount to invest.
- You can stay invested till the maturity of the fund.
- You’re comfortable with market-linked returns and want a more disciplined investment.
Make sure to check the fund’s asset allocation (how much it invests in equity, debt, etc.) before investing.
Tax on Closed-Ended Funds:
Tax rules depend on what the fund invests in:
- If it invests 65% or more in equity, it’s taxed like an equity fund.
- If it invests mainly in debt, it’s taxed like a debt fund.
Always read the offer document to know how your fund will be taxed.
How to Invest in Closed-Ended Funds?
You can invest:
- Directly through the mutual fund company’s website (no distributor charges).
- Through an agent or distributor (they may charge a commission).
Units are only available during the NFO period, so keep an eye out for launch dates.
Note: This blog is for awareness and educational purposes only. It shares the author’s views and is not financial advice or a product recommendation.
