/What are close-ended mutual funds?

What are close-ended mutual funds?

Close-ended mutual fund schemes, as the name suggests, are closed for subscription and sale after the initial subscriptions through New Fund Offer. For example, when you invest in a five-year closed-ended scheme, you are given a fixed number of units. You can redeem them at the end of five years.

Most investors are not familiar with closed-ended schemes because they mostly deal with open-ended schemes that are always open for purchase and sale of units. This open structure makes open-ended schemes more popular with investors.

So, what if you need to sell your investments in a closed-ended scheme in an emergency? As per Sebi mandate, these schemes are listed on the stock exchanges after the NFO period is over. That means you can sell your investments through stock exchanges.

However, this is not a very efficient mechanism as these schemes are hardly traded in stock exchanges. You will be forced to sell the units at a big discount as there are hardly any takers for them in the exchanges.

Some close-ended funds give you an option of selling your units to the mutual fund through periodic repurchase at NAV-related prices. As per Sebi regulations, fund houses must provide at least one of the two exit routes investors: repurchase facility or through listing on stock exchanges.

Now that you know about these schemes, it is the time to find out their advantages and disadvantages? One, fund managers believe close-ended schemes offer an opportunity to investors to focus on wealth creation rather than getting involved in daily ups and downs or various phases in the market. It also gives them the freedom to buy and hold stocks/bonds rather than trade to meet daily redemption requirements.

That means, if you have a lumpum amount you do not need for a certain number of years, you may choose a close-ended scheme with a similar term. However, you should remember that you will not be able to sell your investments in case of an emergency.

However, do not invest blindly in them thinking that because of their structure all close-ended funds return more than open-ended schemes. At least there are no studies to support such a claim. Also, always check whether your investment objective and risk profile is in line with the scheme.

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