What are Close-Ended Mutual Funds?

Close-Ended Mutual Funds

Close-Ended Mutual Funds have a fixed maturity. Investors can buy units of a close-ended scheme only during its NFO. They make arrangement for the units to be traded, post-NFO on a stock exchange. This is done through the listing of the scheme in a stock exchange.

Such listing is compulsory for close-ended schemes, this helps investors to exit the scheme at the market value of that close-ended mutual fund.

Therefore, after the NFO, investors who want to buy units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell units will have to find a buyer for those units in the stock exchange. Since post-NFO, sale and purchase of units happen to or from counter-party in the stock exchange – and not to or from the scheme – the unit capital of the scheme remains stable or fixed.

Since the post-NFO sale and purchase transactions happen on the stock exchange between two different investors, and that the fund is not involved in the transaction, the transaction price is likely to be different from the NAV. Depending on the demand-supply situation for the units of the scheme on the stock exchange, the transaction price could be higher or lower than the prevailing NAV of that close-ended mutual fund.

Also, Learn About Open-Ended Mutual Funds.

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