What are close ended mutual funds

Legendary investor and financial author Venita VanCaspel once said, “A mutual fund can do for you what you would do for yourself if you had sufficient time, training, and money to diversify, plus the temperament to stand back from your money and make rational decisions.” Truly, mutual funds are one of the best investment platforms for individuals keen on participating in the growth of the market and securing their financial future. Mutual funds come in a variety of flavours, be it equity funds, debt funds or hybrid funds, but these schemes are not categorised only on the basis of their portfolio. Mutual funds can also be categorised based on their investment structure and this classification includes three types – close ended mutual fund, open ended mutual fund and interval fund. Today, let us take a look at the various facets of a close ended fund, including closed end fund meaning, and closed end fund example.   

Closed Ended Funds

To know What are Close Ended Funds? Let us begin with understanding the details of close ended mutual fund meaning an equity or debt fund wherein the fund house only issues a fixed number of units at the time of the scheme’s launch. If you wish to invest in a close ended mutual fund, your only opportunity to do so comes at the time of the NFO or New Fund Offer period. At the close of this stipulated NFO duration, investors are not permitted to purchase or redeem units. Following the NFO, these schemes, which have a pre-decided maturity period, are traded in the market, in a manner similar to stocks. Even as the price of the fund is based upon the scheme’s net asset value, the traded price of a close ended mutual fund can be higher or lower than its actual value, in line with the demand and supply in the market.

Advantages of closed ended mutual funds

While the close ended mutual fund category has not been very popular in the past, it is now gaining traction due to a bevy of advantages. Firstly, closed-ended funds provide stability for fund managers due to the restriction wherein investors cannot redeem their units until the maturity date. This structure establishes a fixed asset base for managers to work with, alleviating concerns about maintaining liquidity due to the absence of redemptions. Consequently, fund managers can formulate effective strategies to fulfil the scheme's investment objectives. Secondly, the pricing of closed-ended scheme units parallels that of equity shares, with values influenced by market dynamics of demand and supply. If demand surges for a specific closed-ended scheme while supply remains limited, unit prices can surpass the scheme's Net Asset Value (NAV), offering robust returns for investors. Thirdly, even though such funds may appear illiquid because redemption within the fund house is restricted, closed-ended funds actually offer substantial liquidity through the stock exchange. Opportunities abound for buying and selling units at prevailing market prices, underscoring their tradability and dispelling the notion of being illiquid.

Disadvantages of closed ended mutual funds

As with every avenue, close ended mutual funds also have a few disadvantages such as the fact that they have not demonstrated strong historical performance compared to open-ended schemes. Despite fund managers' ability to devise strategies for achieving investment objectives, past records show that closed-ended funds often fail to deliver superior returns. Separately, the sole option for purchasing units in a closed-ended scheme is during the initial launch, requiring a lump sum investment. This approach heightens risk and does not consider the favoured systematic investment plan (SIP), known for affordability and risk spreading. Finally, unlike open-ended schemes with performance data available across market cycles, closed-ended funds lack this transparency, due to which investors have to depend on the fund manager's choices, rendering the fund's performance primarily manager-driven.

Who should invest in such funds?

Such schemes are suitable for investors keen on undertaking lumpsum investments and holding onto the units till maturity. Accordingly, it is advisable to choose close ended mutual funds which have a maturity period aligned with your time horizon, to ensure optimal returns. In terms of taxation norms, close ended funds fall under both debt and equity categories and are, therefore, taxed in line with the norms prevalent in such schemes. Whether you should invest in close ended funds or not depends on your risk appetite, return requirements, time horizon and financial goals so it is important to map the scheme’s objectives with your own investor profile before taking a decision.

How should you invest?

Investing in a close ended mutual fund can be done either directly through an asset management company (AMC) or with the aid of agents and distributors. By choosing a direct plan, you will receive more units since no distributor commission is deducted. Another option is subscribing to a closed-ended fund online via the official website of a mutual fund company. A few of the popular close ended mutual fund schemes which have offered robust returns include SBI Tax Advantage Fund, ICICI Prudential Growth Fund, ICICI Prudential R.I.G.H.T. Fund, Reliance FHF XXV Series and the HDFC FMP 793D Feb 2014 (1) Reg.

While there are plenty of scheme from which you can choose, always remember that your investment choices should align with your overall portfolio allocation strategy and be capable of delivering the required returns within your risk boundaries. At the same time, it is always prudent keep an eye out for the launch of new close ended funds backed by major fund houses. This will ensure that you are holistically aware of the available investment options and can make optimal investment decisions.

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