Read Definition of Closed End Mutual Funds
Closed-End Mutual Funds
A closed-end mutual fund has a set number of shares
issued to the public through an initial public offering. These funds
have a stipulated maturity period generally ranging from 3 to 15 years.
The fund is open for subscription only during a specified period.
Investors can invest in the scheme at the time of the initial public
issue and thereafter they can buy or sell the units of the scheme on the
stock exchanges where they are listed.
Once underwritten, closed-end funds trade on stock exchanges like stocks
or bonds. The market price of closed-end funds is determined by supply
and demand and not by net-asset value (NAV), as is the case in open-end
funds. Usually closed mutual funds trade at discounts to their
underlying asset value.
Distinct Features of Closed-end Funds
- These funds are closed to new capital after they begin operating
- Closed-end funds trade on stock exchanges rather than being
redeemed directly by the fund
- Unlike open-end funds, the closed-end funds can be traded during
the market day at any time. Open-end funds are generally traded at
the closing price at the end of the market day.
- Closed-end funds are usually traded at a premiuim or discount
whereas open-end funds are traded at NAV.
Advantages of Closed-end Funds
- Closed-end funds don't have to worry about the redemption of
shares, hence they tend to keep less cash in their portfolios and
cam invest more capital in the market. Therefore, they have the
potential to generate greater returns as compared to open-end funds.
- In case of market panic and mass-selling by investors, open-end
funds need to raise money for redemptions. To cope with the
liquidity concerns, the manager of an open-ended fund may be forced
to sell stocks he would rather keep, and keep stocks he would rather
sell. In such as scenario the quality of the portfolio may be
affected.
