What Is a Close Ended Mutual Fund?
- 1st September 2025
- 12:00:00 AM
- 6 min read
Are you looking for stability and discipline through investing? Or want to invest in an asset that is not affected by daily inflows and outflows? Closed-end mutual funds can be a great choice for you, since they offer high stability.
This investment option features a distinct structure that distinguishes it from open-ended funds. This blog provides a beginner’s guide on what is a closed-ended mutual fund, how it works, and the benefits it offers.
What Do Closed-Ended Mutual Funds Mean?
A closed-ended mutual fund is an equity or debt fund that is launched with a certain number of units issued by the fund house. Investors cannot buy or redeem units in a closed-ended fund after the new fund offer (NFO) window has closed.
These funds have a set maturity period and are issued through an NFO, which then trades on the market like stocks. The Net Asset Value (NAV) reflects the fund’s actual price, but the market trading price may be higher or lower based on the demand and supply of its units.
In simple terms, a closed-ended fund closes after the launch period and stays the same until maturity. This gives the fund management more flexibility in pursuing the fund’s investment goals.
How Do Closed-Ended Funds Operate?
New investors cannot invest in closed-end mutual funds after the NFO period ends, and existing investors cannot leave until the scheme matures. After its maturity, investors receive their money back at the current net asset value (NAV) on the maturity day. However, investors have the option to exchange the units on secondary markets if they choose to sell before the maturity term ends.
To raise money for a closed-end mutual fund, an IPO is frequently required at the fund’s launch. In return for their monetary contributions, mutual fund participants receive shares. After that, these funds offer units on the secondary market, where investors can trade them according to supply and demand.
A closed-end mutual fund does not issue new units or repurchase existing ones as it introduces units just once. Later, the only method to invest in this fund is to buy already-existing units that are on the open market.
Maturity Date of Closed-Ended Funds
The maturity period of closed-end mutual funds is predetermined and announced at the time of commencement. Usually, these funds mature within 3 to 7 years, depending on the goal of the scheme. Investors can only trade units on stock exchanges or leave at maturity, unlike open-ended funds, if liquidity is available.
Benefits of Closed-Ended Funds
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High Stability
Since investors cannot prematurely redeem units, closed-ended funds give fund managers a solid asset base. Since these funds do not allow redemptions for a specific period, you can make a strategic plan that supports investment goals.
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Capital Appreciation
The value of closed-end mutual funds may increase over time, just like stocks. Investors may benefit from the possibility of capital gains as a result.
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Impact of Demand and Supply
You can sell the units of a certain closed-ended fund more than the scheme’s NAV if demand rises and supply stays low.
If you want to avail such benefits from mutual funds, you must download the PL Capital Group – Prabhudas Lilladher application and open a Demat account with it for free. PL offers you to invest in mutual funds from 35+ mutual fund categories.
Drawbacks of Closed-Ended Funds
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Poor Historical Performance
While examining closed-ended funds’ historical record, it does not indicate that they have produced higher returns than open-ended schemes.
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Limited Flexibility
Compared with open-ended mutual funds, closed-ended mutual funds are less flexible. Investors cannot redeem the units of the fund at any point. Only the stock exchange can sell its units.
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Limited to Lump Sum Investment
Closed-end mutual funds require a lump-sum investment, as units can only be bought during the first launch period, which can be problematic. Additionally, since it is inexpensive and distributes the risk, a lot of investors like the systematic investment plan (SIP) method of investing.
Different Types of Closed-Ended Funds
You can make two types of investments in closed-end mutual funds:
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Bond Closed-Ended Funds
Bond funds make up the majority of the assets in closed-end funds. Credit and market risk are inherent in all closed-end bond funds.
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Equity Closed-Ended Funds
The risk for all equity closed-end funds is that their market price and NAV may decline if the assets in their portfolio depreciate.
Who Needs to Invest in Closed-Ended Mutual Funds?
Since you have understood closed-end mutual funds, their benefits, and limitations, you must know who can benefit the most by investing in these funds:
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Goal-Oriented Investors
If you have a specific goal for your investment, like creating an investment corpus or allocating funds for a major expense, this category of funds can be a good option for you.
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Long-Term Investors
These funds are also beneficial for investors who can invest funds for a long duration without the need for liquidity.
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Investors With High Risk-Tolerance
If you can tolerate high levels of risk, you can invest in closed-end funds. These funds invest in a diverse range of assets, which may pose risks.
Final Thought
Closed-end mutual funds have the potential to be a great source of income. However, you should also consider the drawbacks. These funds are best for investors who have a long-term plan and a high risk tolerance.
Download the PL Capital application to invest in more than 2500 mutual fund schemes. PL allows you to invest in mutual funds through both lump-sum and SIP.
Frequently Asked Questions
1. How to invest in closed-ended funds?
Like dividend stocks, you can trade closed-end funds on stock exchanges and over-the-counter marketplaces. You can easily get these funds through your brokerage platforms.
2. How are closed-end funds different from open-end funds?
You can redeem and purchase open-ended funds at any time, but closed-end mutual funds have a set maturity and are only accessible for investment during the NFO period.
3. What is a closed-end mutual fund in simple terms?
A closed-end mutual fund offers a set number of units during its launch. After that, it either does not allow taking new investments or permits direct redemptions by existing investors.
4. How to redeem closed-end mutual funds?
You can sell closed-ended funds only on the stock exchange at market prices before maturity or redeem at maturity.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
