Ever come across mutual funds that don’t let you enter or exit whenever you want? That’s exactly how closed-ended mutual funds work. These schemes come with a fixed lock-in period, and you can invest in them only during a specific window—the New Fund Offer (NFO) period. Once this period ends, you're in for the entire duration unless you choose to sell on the stock exchange.
Unlike open-ended funds that offer flexibility, closed-ended mutual funds are structured quite differently. Knowing how they function and what makes them unique can help you decide if they fit your long-term investment strategy. In this article, we’ll walk you through everything you need to know how they work, when they mature, their pros and cons, and who should consider investing in them. If you're looking to match your investment strategy with specific timelines, closed-ended funds offer built-in discipline while keeping your long-term goals on track. Compare Mutual Fund Options Now.
What are closed-ended funds?
A closed-ended mutual fund is like a limited-time offer—you can only invest during its NFO period. Once launched, the fund house issues a fixed number of units, and after that, no new entries or exits are allowed until the scheme matures.
These funds behave somewhat like stocks. After the NFO ends, the units get listed on the stock exchange, and investors can buy or sell them just like any other stock—based on demand and supply. While the Net Asset Value (NAV) represents the actual worth of the fund, the market price can fluctuate above or below this NAV, depending on how investors perceive its value.
So, once the fund is launched and the NFO closes, you can’t invest directly through the fund house anymore. The only way in is by purchasing units from someone else on the exchange. This fixed structure allows the fund manager to focus purely on the investment strategy without worrying about constant redemptions. Closed-ended funds can help you avoid impulsive exits and offer a more structured investing experience driven by the fund manager’s long-term conviction. Start Your SIP Today.
How do close-ended funds work?
Let’s break it down step-by-step. The asset management company launches a close-ended fund via an NFO. You can buy units only during this short window. Once it closes, no new investors can join, and you, as an investor, can’t exit until maturity—unless you trade on the stock exchange.
When the scheme matures—typically in 3 to 7 years—you receive your investment back based on the NAV on that date. If you want to exit before that, you can sell your units in the secondary market, provided there’s enough liquidity.
These funds usually begin with an Initial Public Offering (IPO), after which units are listed for trading. What’s interesting is that no additional units are created, and the fund doesn’t buy back existing units either. It’s a one-time offer, and once you’re in, you ride the wave until the end—or exit via stock trading.
When do close-ended mutual funds mature?
Closed-ended mutual funds aren’t open forever—they come with a fixed maturity date right from the start. Most of these funds are designed to run for a specific tenure, usually between 3 to 7 years. So, when you invest, you already know how long your money will be locked in.
This maturity date isn’t just a formality—it plays a crucial role in how the fund manager builds and maintains the portfolio. Since there are no frequent inflows or redemptions, fund managers can align investments with the end date, aiming to maximise returns by the time the fund matures.
If you need access to your money earlier, you might have the option to sell the fund units on the stock exchange. But keep in mind, liquidity isn’t always guaranteed—so it’s best to enter these funds only if you’re confident about staying invested till maturity.
Features of close-ended funds
Closed-ended mutual funds stand out because of their structure and limitations. Here are some key features you should know before investing:
- Lock-in period: Once you invest, your money stays put for the entire tenure. You can't redeem units with the AMC during this time.
- Limited investment window: These funds are available only during the NFO period. If you miss it, the only way in is through stock market purchases.
- No SIPs allowed: Since the scheme is closed after the NFO, you can’t use Systematic Investment Plans (SIPs) to invest more later.
- No averaging opportunities: You can’t add more investments once the NFO ends, which means you can’t average out costs like in open-ended funds.
While these features limit flexibility, they also offer fund managers a stable asset pool to work with—leading to a more focused investment strategy.
Types of investments in close-ended funds
Closed-ended mutual funds don’t all invest in the same things. Broadly, they come in two types, based on what kind of assets they hold:
1. Bond Closed-End Funds
These are the most common type and primarily invest in bonds and other debt instruments. While they offer steady returns, they come with their own set of risks:
- Market risk: If interest rates rise, the value of the bonds held by the fund can fall.
- Credit risk: There’s always a chance that the issuer of a bond might default.
Bond funds tend to be more sensitive to interest rate movements, especially if the bonds have longer maturity periods.
2. Equity Closed-End Funds
These funds invest mainly in stocks. Like any equity investment, they’re exposed to price volatility and market trends. The value of the units can swing based on:
- The financial health of the companies in the fund’s portfolio
- Industry-specific trends
- Broader market performance
Equity closed-end funds carry higher risk but also have the potential for higher returns—making them suitable for investors with a longer time horizon and higher risk appetite.
Advantages of close-ended funds
Closed-ended mutual funds may not be as popular as their open-ended counterparts, but they come with a few unique benefits that can work in an investor’s favour.
1. Stable asset base
Since investors can't enter or exit after the initial offer period, fund managers don't need to worry about sudden redemptions. This stable asset base allows them to take a long-term view and hold investments till maturity without being forced to sell early.
2. Opportunity for disciplined investing
Closed-ended funds indirectly encourage discipline. Once you invest, you stay invested—there’s no room for panic-selling or reacting to short-term market fluctuations. This can help avoid emotional investing mistakes and allow your money to grow steadily over time.
3. Listed on stock exchanges
Even though you can't redeem directly with the fund house, closed-ended funds are listed on stock exchanges. So if you need to exit early, you might be able to sell your units to other investors—though liquidity and pricing can vary depending on demand.
4. Ideal for target-based goals
With a known lock-in period and maturity date, these funds are great for medium-term financial goals like planning for a vacation, wedding, or a down payment. You can align your investment timeline with your life goals.
How to evaluate close-ended funds before investing
Closed-ended funds may seem rigid, but choosing the right one can make a difference. Here are a few factors to consider before you commit:
1. Fund manager’s track record
Unlike open-ended funds that are reviewed constantly, closed-ended funds rely heavily on the fund manager's long-term decisions. Research their past performance and experience, especially in similar fund types.
2. Investment strategy
Read the scheme document carefully to understand the fund’s objective. Is it growth-focused? Income-oriented? Does it lean more towards equity or debt? Knowing the approach helps align it with your own goals.
3. Risk profile
Closed-ended funds don’t offer exit flexibility, so evaluate the inherent risks. Equity-based ones can be volatile, while debt-focused funds may carry interest rate or credit risks.
4. Portfolio quality
While you may not see the entire portfolio at launch, look at the historical portfolios of similar schemes from the AMC. This gives an idea of the asset quality and risk exposure you might expect.
5. Fund house reputation
Established fund houses often have more experienced fund managers and better research capabilities. This can improve the chances of achieving consistent returns, especially in long-tenure funds.
Who should invest in a closed-ended mutual fund?
Closed-ended mutual funds aren’t for everyone—but they can be a good fit for certain types of investors.
- Goal-based investors: If you’re saving for a specific purpose in 3–7 years, like a home renovation or vacation, the fixed maturity period may help keep you disciplined and aligned with your timeline.
- Investors with moderate to high risk tolerance: These funds can carry volatility (especially equity-based ones) and may lack liquidity. They're better suited for those who can tolerate short-term fluctuations.
- Seasoned investors looking to diversify: If you already have open-ended funds or SIPs and are looking to explore other options, adding a closed-ended scheme can add a new layer of diversification to your portfolio.
- Investors who don’t want to monitor daily: With no option to redeem mid-way, you're less tempted to react to market news. It’s a set-it-and-forget-it strategy—ideal if you want to reduce emotional investing.
5 reasons to use closed-end funds in your portfolio
Closed-end funds often provide high distribution rates compared to open-end funds. They can pay dividends from various sources, including income, capital gains, and return of capital, making them appealing for income-focused investors seeking regular cash flow.
- Efficient portfolio management: These funds have a fixed number of shares, allowing managers to invest without the pressure of redemptions. This stability enables managers to pursue long-term strategies, invest in less liquid assets, and maintain positions without the need to sell assets during market downturns.
- Potential to enhance returns through leverage: Closed-end funds can use leverage to amplify returns. By borrowing funds to invest, they can increase their purchasing power and potentially achieve higher returns. However, this strategy also increases risk, making it suitable for investors comfortable with added volatility.
- Exchange traded liquidity: Shares of closed-end funds are traded on stock exchanges, providing investors with liquidity similar to stocks. This means investors can buy or sell shares throughout the trading day at market prices, offering flexibility and the ability to respond quickly to market conditions.
- Premiums/discounts: Closed-end funds often trade at a premium or discount to their net asset value (NAV). Savvy investors can take advantage of these price discrepancies, potentially buying shares at a discount for higher returns or selling at a premium to realise gains, adding a unique opportunity for value-based investing.
If you seek stable income with the added benefit of strategic flexibility, closed-end funds can be an efficient addition to your long-term portfolio strategy. Explore top-performing mutual funds
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Taxability of close-ended mutual funds
Taxation of close-ended funds varies based on the types of securities held by the mutual fund. For equity-oriented close-ended funds, where over 65% of assets are invested in equity:
Short Term Capital Gains tax, applicable if units are sold within a year, stands at 15%.
Long Term Capital Gains tax, triggered after holding units for over a year, is set at 10%.
For other funds, the tax treatment is different:
- Short Term Capital Gains tax applies if units are sold within 3 years, taxed according to the individual's tax bracket.
Long Term Capital Gains tax, incurred after holding units for over 3 years, is 10% without indexation benefit or 20% with indexation benefit. - It's advisable to compute the tax liability using both methods before deciding on the suitability of opting for indexation benefits.
Tax rules can significantly impact your final returns, especially with closed-end funds, so reviewing your fund’s structure is just as crucial as its performance. Save taxes with ELSS mutual funds
Disadvantages of close-ended funds
Here are some advantages of close-ended mutual funds:
Limited flexibility: Closed ended mutual funds are not as flexible as open ended mutual funds. Investors cannot redeem their shares from the fund at any time. They can only sell their units on the stock exchange.
Highly driven by fund manager’s decisions: Investors often look at a mutual fund's performance over multiple market cycles to assess whether it is a good investment. The financial data for open-ended funds are updated half-yearly, and NAV is updated daily.
Historical performance concerns: Past performance of closed-ended funds has not consistently demonstrated superior returns compared to open-ended schemes, despite fund managers' strategic flexibility.
Limited lump sum investment: Closed-ended schemes only allow lump sum investments during the launch phase, increasing risk. Investors favour the affordability and risk spread of systematic investment plans (SIPs). Closed-end funds aren’t ideal for investors who value flexibility and track record above all—know the limitations before locking in your money. Compare mutual fund options now.
How to invest in close-ended funds?
You have the option to invest directly through an asset management company (AMC) or enlist the services of agents and distributors. Opting for a direct plan entails receiving a greater number of units, as no commission is incurred for a distributor. Alternatively, you can conveniently subscribe to a closed-ended fund online by visiting the official website of a mutual fund company. Investing in closed-end funds is simpler than most assume—you can begin online via AMC platforms or distributors, based on your comfort and commission preference. Open your mutual fund account today.
Understanding the role of premiums and discounts in close ended funds
Close-ended mutual funds trade on stock exchanges, and their market price may differ from the fund’s net asset value (NAV). When the fund trades above its NAV, it is said to be trading at a premium. This usually happens when investor demand is high, often due to strong past performance or market sentiment. On the other hand, when the fund trades below its NAV, it is at a discount, which may occur due to lower liquidity, poor performance, or negative market perception.
Premiums and discounts impact investor returns, as buying a fund at a premium may reduce potential gains, whereas purchasing at a discount could offer an opportunity for higher returns when the price corrects. Investors should assess factors such as fund performance, market trends, and liquidity before making investment decisions in close-ended funds. A fund's trading price versus its NAV can create hidden opportunities or risks understanding this pricing gap helps you avoid emotional buying and selling decisions. Start SIP with just Rs. 100
Things to know before investing in close-ended mutual funds
Investment horizon: Choose funds with maturity periods aligning with your investment goals.
Market research: Research the fund's historical performance, investment strategy, and track record of the fund manager.
Exit strategy: Understand the implications of limited liquidity and be prepared to hold until maturity. Before locking in funds, assess if the tenure and fund philosophy match your goals—closed-end investing works best with clear expectations. Compare mutual fund options now.
Conclusion
Close-ended mutual funds offer a unique investment avenue for those seeking a disciplined, professionally managed approach with the potential for outperformance. While they come with advantages like expert management and potential for market opportunities, investors should carefully consider factors like limited liquidity and their own investment goals. By understanding the characteristics and nuances of closed-ended funds, investors can make informed decisions that complement their overall investment strategy. Choose from 1000+ mutual funds at Bajaj Finserv platform and start investing today!
