Close-Ended Mutual Funds: Meaning, Features & ExamplesMany people are choosing to invest in mutual funds because it`s a good way to build wealth over time. There are several types of mutual funds, and one special kind is called close-ended mutual funds. These funds have a unique way of working, including how they invest money and how easy it is to get your money back. Learning about close-ended mutual funds can help investors make smarter choices and spread out their investments better. In this blog, we`ll explain what close-ended mutual funds are, how they work, their benefits, possible drawbacks, and give some examples.
What Are Close-Ended Mutual Funds?A close-ended mutual fund is a type of fund that has a set number of shares or units. Unlike open-ended funds, where you can buy or sell shares anytime, close-ended funds can only be bought during a special period called the New Fund Offer (NFO). Once this period is over, no more units are created, and investors can only trade the existing units on the stock exchange, just like buying or selling company shares. In simple terms, close-ended funds work like a limited-time investment product with a fixed duration, usually between 3 to 10 years. These funds invest in different kinds of financial assets, such as stocks, bonds, or a mix of both, depending on their goal.
Key Features of Close-Ended Mutual FundsClose-ended mutual funds have some key features that make them different from open-ended funds. Here are the main traits:
1. Fixed Corpus and UnitsA close-ended fund has a set number of units that are fixed from the start. Once the initial offering period is over, the fund can`t create more units. This fixed number helps the fund manager plan investments better because they don`t have to deal with unexpected increases or decreases in the number of units.
2. Limited Subscription PeriodInvestors can only buy units during the NFO, which typically lasts for a few weeks. Once this time is over, the fund starts trading on a stock exchange, and people can purchase or sell units through their brokers.
3. Listed on Stock ExchangesClose-ended funds have units that are bought and sold on stock exchanges. The price of these units can go up or down depending on how much people want to buy or sell, what investors are feeling about the market, and the Net Asset Value of the fund.
4. Maturity PeriodClose-ended funds have a set time they are open, usually between 3 and 10 years. Once that time is up, the fund is closed, and people who invested get their money back based on the fund`s value at the end.
5. Investment ObjectivesClose-ended funds can follow different investment strategies: Equity-oriented funds: Invest primarily in stocks. Debt-oriented funds: Invest in bonds, government securities, and money market instruments. Hybrid funds: Combine both equity and debt instruments.
6. Professional Fund ManagementClose-ended funds, like other mutual funds, are handled by professional managers who choose investments to get the best returns while keeping risks under control.
Types of Close-Ended Mutual FundsClose-ended mutual funds can be classified based on their investment objectives and asset allocation:
1. Equity Funds: Invest mainly in stocks of companies. These investments are good for people who want to grow their money over a long period of time.
2. Debt Funds: Put your money into fixed-income investments such as bonds, debentures, and government securities. These options are best for people who want to avoid big risks and get steady income.
3. Hybrid Funds: Invest in a mix of equities and debt to balance risk and return.
4. Sectoral or Thematic Funds: Focus on certain areas like technology, healthcare, or infrastructure. These are areas where there can be big rewards but also higher risks, so they are best for people who know a lot about investing.
Advantages of Close-Ended Mutual FundsClose-ended funds offer several benefits to investors, making them an attractive investment option:
1. Professional ManagementInvestors gain from the knowledge of professional fund managers, who choose investments wisely by looking at research and what`s happening in the market.
2. Potential for Capital AppreciationEquity-focused close-ended funds can provide good long-term gains, especially when the stocks they hold do well.
3. Fixed MaturityThe set time period for close-ended funds helps keep investors committed for a specific length of time.
4. DiversificationThese funds put your money into a mix of different investments, which helps lower the risk that comes with putting money into single stocks or bonds.
5. Availability on Stock ExchangesUnits of close-ended funds can be bought and sold on stock exchanges, which means you can sell them even after the NFO period has ended. However, the price at which they are traded might not be exactly the same as the NAV.
6. Lower Volatility (for debt funds)Debt close-ended funds usually don`t fluctuate as much as equity funds, which makes them a good choice for people who prefer a safer investment approach.
Disadvantages of Close-Ended Mutual FundsWhile close-ended funds have advantages, they also come with certain drawbacks:
1. Limited LiquidityBecause investors can only buy or sell units through stock exchanges, there might not be enough liquidity, especially for funds that aren`t very popular.
2. Market Price RiskThe shares of closed-end funds can sometimes sell for more or less than their net asset value, based on what investors are willing to pay and what`s available in the market.
3. Fixed TenureInvestors can`t take back their money before the end date of the investment, unless they sell through the stock market, which could be a problem if they need the money suddenly for an emergency.
4. Less FlexibilityUnlike open-ended funds, investors cannot invest additional money or withdraw partially at any time.
5. Market RiskEquity-focused close-ended funds can lose value when the market goes down, which might result in losing some or all of the invested money.
Examples of Close-Ended Mutual FundsTo give you a better idea, here are some examples of close-ended mutual funds that are available in India:
- HDFC Fixed Maturity Plans (FMPs) - Debt-oriented funds with a fixed maturity period, ideal for conservative investors.
- ICICI Prudential Bluechip Fund - Series - Equity-oriented close-ended fund focused on large-cap stocks.
- Aditya Birla Sun Life Infrastructure Fund - Sectoral close-ended fund investing in infrastructure companies.
- SBI Magnum Midcap Fund - Series - Mid-cap equity-focused close-ended fund with a fixed tenure.
These examples show how there are many different types of close-ended funds, which can fit the needs and goals of investors who have different levels of risk they`re willing to take.
How to Invest in Close-Ended Mutual FundsInvesting in close-ended mutual funds involves a few simple steps:
- Identify the NFO Period: Check the launch date and subscription period.
- Understand the Fund Objective: Read the scheme information document (SID) carefully.
- Invest Through Brokers or Platforms: Submit your application during the NFO period.
- Monitor the Fund: Track performance and trading price on stock exchanges.
- Exit Strategy: Decide whether to sell on the stock exchange before maturity or redeem at maturity.
ConclusionClose-ended mutual funds are a good choice for people who want organized ways to invest and possibly earn more money. These funds have a set amount of money, are managed by professionals, and include a mix of different investments, which makes them appealing, especially for those planning to invest over a long time. But before investing, it`s important to think about things like market risks, how easy it is to get your money back, and the fixed time period for which the fund is open. By learning about what close-ended mutual funds offer, their benefits, and their drawbacks, investors can make smarter choices and improve their overall investment plan.
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Posted on: 20-Dec-2025 | Posted by: NIFM |
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