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Find out what a closed-end fund means and the advantages these funds offer to an investor.
Planning on investing is always a significant step to help secure a better future for yourself. With several ways to start investing, mutual funds have become one of the most sought-after investment options for most people. Mutual funds can be of different types like open-ended funds, closed-end funds, and interval funds. So, what is a close-ended mutual fund? In this article, we look at a closed-end fund and the advantages it offers.
Like any other mutual funds, close-ended mutual funds are managed by investment managers who pool together money from various investors to invest in a mutual fund scheme. Each investor gets a share, which they can easily trade in a secondary market.
These funds are available only during the New Fund Offer (NFO) period. Once all units are issued, no new investments are allowed. Investors can buy or sell units on stock exchanges, with prices depending on the fund’s maturity, performance, and market demand. The Net Asset Value (NAV) is calculated regularly.
Close-ended funds operate for a fixed tenure, making them suitable for medium- to long-term goals. Fund managers invest a fixed pool of money, while investors can exit through the market or receive returns at maturity.
Close-ended mutual funds have a defined structure and investment timeline. Here are the key features that set them apart from open-ended funds:
Close-ended mutual funds invest across different asset classes based on their investment objectives and risk profiles.
With different mutual fund options in the market, let us look into how advantageous your investment in a close-ended mutual fund can be:
Since the investors cannot redeem closed-end funds before a fixed period, the capital which the fund managers collect is stable. Fund managers need not worry about the liquidity of the asset since they have a set period within which they need to invest to earn returns. With stable capital, fund managers can strategise their plans and achieve the investment objectives of their scheme.
Closed-end funds are sold on the exchange like stocks. As such, investors can trade their shares at prices that might be above the Net Asset Value of the shares. Also, buyers can buy shares at discounted rates, depending upon the NAV of the funds.
Investors are permitted to liquidate their investment per fund norms. They may utilise real-time prices of the fund during the trading day to buy or sell your fund units at the existing market prices. This feature offers great flexibility to investors by giving them an option to hold on to their shares or sell them off.
Since closed-end mutual funds require the New Fund Offers to be bought within a specific time in the initial phase, the investment needs to be done at one go. The investment amount can thus be significant, which, in turn, increases the risk of the investor. There are no Systematic Investment Plan options, which help spread the risk across the investment.
Compared to other mutual fund schemes, with closed-end mutual funds, investors do not get access to the performance analysis. These funds are driven solely by fund managers. At best, investors can investigate the performance of fund managers to analyse the performance of other funds handled by the managers in the past.
Before investing in a close-ended mutual fund, it is important to assess whether the fund aligns with your financial goals, risk appetite, and investment timeline.
Close-ended mutual funds are best suited for investors with a disciplined, long-term investment mindset and specific financial objectives.
Investing in a close-ended mutual fund involves a structured process and requires action during the fund’s offer period.
Step 1: Check your investment suitabilityEnsure you have a lump sum to invest and a long-term investment horizon.
Step 2: Choose the right fundReview the fund’s objectives, tenure, risk level, and fund manager track record.
Step 3: Select a trusted distributor or platformInvest through AMFI-registered distributors or authorised digital platforms.
Step 4: Apply during the NFO periodClose-ended funds are available only during the New Fund Offer window.
Step 5: Complete KYC and documentationSubmit identity and address proof to finalise your investment.
Step 6: Track your investmentMonitor performance and hold till maturity or exit through the secondary market if needed.
Close-ended mutual funds provide a structured investment option with a fixed tenure, professional management, and potential for long-term wealth creation. They require careful consideration due to lump-sum investment requirements and limited liquidity. Understanding their features, risks, and suitability helps investors align them with financial goals. For efficient fund management and seamless investment planning, consider opening a Savings Account with DBS Bank today.
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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.
DBS Bank offers Mutual Funds that are instant, paperless, signatureless – even transaction fee-less! What’s more? You get to choose from 250+ Mutual Funds across 15 top-performing asset management companies. So why wait? Login to digibank (app or internet banking) and start investing in a flash with instant Mutual Funds on DBS Bank.
Read up more on Mutual Funds here.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.
