What are Close Ended Mutual Funds?
Close ended fund is a type of mutual fund. The units of a close ended fund are available for purchase only during New Fund Offer. Once the new fund offer period is over, fresh units of the close end fund will not be available for purchase. In short, you can invest in a close end fund only during the time of initial fund offer.
Features of Close Ended Mutual Funds
The salient features of close end funds are:
- Helps build a steady asset base
- Investors can sell these funds on real time prices after maturity date
- Offers maximum possible returns
- Suitable for long term investment
Benefits of Close Ended Mutual Funds
The benefits of close ended mutual funds are:
- Stability - Close ended funds offer stability in terms of asset evaluation. Such funds can easily invest in equity, debt, and other financial instruments as per the market movements. A close ended fund accumulates a rigid asset base during the NFO period.
- Immune form outflows - Close ended funds are immune to large inflows and outflows. Under a close ended fund, investor money is subject to a lock-in period until maturity.
- Trading - Investors have the option of trading their close ended funds on the stock market. The trading price can be below or above the NAV of the fund during the time of purchase.
- New opportunities - Investors can invest in new and innovative strategies which existing funds do not offer.
How does a Close Ended Fund Work?
A Close ended fund works similar to a mutual fund. Investors can purchase units of a close ended fund only during the NFO period. The maturity period of the fund is 3 to 4 years and the investors are not allowed to exit the fund before the maturity of the scheme.
Close ended funds can be traded in the stock market like any other security. The price of the units can vary as per the market fluctuations. Investors who want to exit the fund before maturity can sell their units on the stock market.
How to Invest in Close Ended Funds?
Investors can invest directly with an asset management company or via distributors and agents. When you invest in a direct plan, you receive higher number of units as no commission is paid to the distributor. Investors can also subscribe to a close ended fund online from the official website of the mutual fund company.
