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Close Ended Funds - Advantages and Risks Involved



The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. These schemes are launched with an initial public offer (IPO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the stock exchanges where they are listed. Unlike open-ended schemes, the unit capital in closed-ended schemes usually remains unchanged. After an initial closed period, the scheme may offer direct repurchase facility to the investors. Closed-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closer to the maturity date of the scheme.

Close ended funds makes available to the public fixed numbers of shares in the IPO also called initial public offering. These shares are traded on the stock exchange. Prices of the shares are determined by the demand of the individuals investing. Share prices are not ascertained by NAV or Net asset value.

Mutual Fund Company also known as a sponsor by means of underwriting produces funds intended to be invested with a definite purpose. A fund managing personnel is assigned the job of handling the close ended funds. One cannot buy close ended funds by posting a check. The close ended funds are required to be bought from the open market similar to the stocks. The best time to purchase close ended funds is promptly after the close ended funds are issued in the market. Although, the NAVs (Net asset values) and prices are all mentioned on the stock exchange, one may find it difficult to provide liquidity to the same. There are times when there is an abrupt fall of the prices of the share. It may as well dip below the NAV; it is during this time that the close ended funds get sold for discounts. One may invest as much as $5000 but one must keep in mind that it is a commitment for a minimum period of 5 years.

Advantages of close ended funds :

There are certain advantages of close ended funds as mentioned below :

  • One can avail of the facility of buying closed ended funds at a discount rate.
  • Discount on the closed ended funds is calculated by ascertaining the difference between NAV and close ended funds value.
  • The main benefit of close ended funds lies in the fact that an individual intending to own stocks, can avail of the close ended funds at a discounted rate and at the same time possess quality stocks.

Risks of close ended funds :

There are certain risks associated with close ended funds

  • Closed ended funds can change abruptly and drastically.
  • Closed ended funds are basically ever changing in nature.
  • Close ended funds must be invested in preferably by veteran investing individuals.
  • Shares of close ended funds can be discounted to such an extent due to which owner of the shares are unable to know the actual value of the shares.
Mutual Funds
Mutual Funds