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How do close ended mutual funds work?

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By : Swarali Chavan    99 or more times read
Submitted 2019-03-13 17:59:04
Fixed income investors generally are attracted to close-ended funds since many of the funds are designed to provide a steady stream of income, generally on a monthly or quarterly basis opposed to the biannual payments that are provided by individual bonds. All the types of funds pool the investments of numerous investors in a single basket of securities or the fund portfolio. Close ended funds are organized as a publicly traded investment. They raise a fixed amount of capital through an initial public offering. The funds are then structed, listed and traded like a stock on stock exchange. Stock prices of close ended funds fluctuate according to the market forces, like supply and demand and as well as changing the values of the securities in the fund’s holding. The investor should understand the difference between close ended mutual fund and open ended mutual fund meaning to choose one.

Close ended funds are traded and priced throughout the day. They require a brokerage account to buy and sell. A close ended mutual fund is a scheme where the investors may only subscribe to them during the new fund offer period. A New Fund Offer is when a mutual fund scheme is launched by a fund house. These offers are launched with the aim of raising the funds from the investors which may be invested in different assets. Interested investors may also submit their application to get access to the units of the new fund at the offer price.

How does a close ended mutual fund work?
Close ended schemes have a specified tenure and a fixed maturity date. After the tenure has ended, the scheme will be dissolved, and the money will be returned to the investors. Close ended funds let the fund manager manage the compilation more efficiently because the funds raised by the scheme will be locked in during the tenure. This will allow the fund manager to create a suitable long-term investment strategy for the scheme. This also relieves the pressure of delivering the returns between the short-term pressures. The fund managers may also analyze different assets and select those which have the best growth potential. Some of the assets may not offer much liquidity in the short-term but they may have the potential to deliver good returns when held over a long term. To provide the investors a platform for entering and exiting the mutual fund scheme, the same will be listed on the stock exchange. The units of scheme are freely traded between the investors. Stockbrokers act as intermediary to the process of buying and selling of units. These units may be traded at a premium or discount to the NAV depending on market forces. The number of close ended mutual fund units traded on the market remain the same throughout the tenure period.
Author Resource:- Swarali Chavan is a finance professor. In her free time, she reads upon and studies about market investment instruments. She has spent considerable time researching onclose ended funds. In this article, she has provided detailed information on how close ended funds function.
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