Posted by: Arihant Expert

Re: What are closed-ended funds?

There are several types of mutual fund schemes and by constitution there are broadly two types of mutual fund scheme: Open-ended mutual funds and Closed-ended mutual funds. Closed-ended mutual funds are a type of mutual fund scheme that is open for investment only at the time of its New Fund Offering (NFO), i.e. the initial fund offering, and once the launch date is over, the fund is closed for subscription and they do not accept subsequent investments. The fund is then structured, listed and traded like a stock on a stock exchange. Similar to a company, a closed-ended fund issues a fixed number of shares in an initial public offering, which trade on an exchange. No fresh units are issued in the closed-ended fund, unless the fund opens for subscription. Closed ended funds have a pre-determined maturity period, generally ranging from 3-5 years. You can think of a closed-end fund, then, as “closed-ended” because the cash flow door -- into and out of the fund -- is always (with a few exceptions) closed. The manager only invests a fixed amount of cash that was raised in an initial public offering of the fund’s shares. If you want to buy shares of the fund, you buy the shares from another investor via a stock exchange. The number of fund shares do not fluctuate based on investor demand. However in an open-ended fund the fund is always open to take fresh investments from investors. In other words, the portfolio manager continues to invest new cash from investors, and the fund company continues to offer new shares of the fund to new investors.