Table of Contents
Introduction
Investors often seek structured investment options that provide a balance of stability and growth. Close-ended funds are designed to meet these needs, offering a fixed-term investment opportunity with predefined returns and portfolio strategies. In this article, we’ll explore what close-ended funds are, how they work, their risks, benefits, and suitability for different investor profiles.
What are Close Ended Funds?
Close-ended funds are mutual funds that have a fixed tenure and a predetermined corpus size. Once the fund is launched, investors can subscribe to it during the New Fund Offer (NFO) period. After this, units are traded on the stock exchange, similar to shares.
- Fixed Tenure: The fund has a specific maturity period, typically ranging from 3 to 7 years.
- Limited Subscriptions: Investments can only be made during the NFO, unlike open-ended funds.
- Tradable on Exchanges: Units can be bought or sold on the stock market during the fund’s tenure.
How does This Work?
Close-ended funds follow a structured investment process:
- New Fund Offer (NFO): Investors can buy units only during the NFO period.
- Fixed Corpus: Once the subscription closes, no new units are issued, ensuring a stable asset base.
- Portfolio Management: The fund manager allocates assets to achieve the fund’s investment objective, often focusing on specific sectors or themes.
- Stock Market Trading: Investors can trade units on the stock exchange, with prices influenced by demand, supply, and NAV.
- Maturity Period: At the end of the term, the fund liquidates its assets, and returns are distributed to unit holders.
Understanding the Risks:
Investors should be aware of potential risks:
- Liquidity Risk: Limited redemption options before maturity; units must be sold on the stock exchange.
- Market Risk: NAV fluctuations can affect returns, influenced by market volatility.
- Discount to NAV: Units might trade at a discount on the exchange, reducing potential profits.
- Concentration Risk: Some close-ended funds focus on specific sectors or themes, increasing exposure to sectoral risks.
Benefits and Features:
Close-ended funds offer distinct benefits and features:
- Fixed Term: Clear investment horizon with defined maturity.
- Limited Subscription: Units available only during the NFO period.
- Exchange Listing: Units can be traded on the stock market, offering some liquidity.
- Professional Management: Experienced fund managers oversee the portfolio.
- Structured Returns: Investments aligned with specific financial objectives, like income generation or capital appreciation.
Who all should invest?
Close-ended funds are ideal for:
- Goal-Oriented Investors: Individuals with a clear financial goal matching the fund’s tenure.
- Long-Term Investors: Those willing to stay invested for the entire tenure to maximize returns.
- Moderately Aggressive Investors: Investors comfortable with limited liquidity and willing to take calculated risks for higher returns.
- Diversifiers: Suitable for those seeking exposure to specific sectors, themes, or asset classes.
Conclusion
Close-ended funds offer a unique investment avenue for those seeking structured, goal-oriented opportunities with professional management. While they provide potential for higher returns and disciplined investment, it is essential to consider risks like limited liquidity and market fluctuations. Evaluating your financial objectives and risk tolerance will help determine whether close-ended funds align with your portfolio strategy.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.