What is a Close Ended Mutual Fund?
Have you ever wondered why some mutual funds are available for a limited time and then suddenly close to new investors? That’s exactly what happens with a close ended mutual fund. These funds are like exclusive clubs—they open their doors for a short period, collect money, and then shut the gates. Once the entry is closed, you can’t join unless you buy units from someone else on the stock exchange. Sounds intriguing, right?
If you’re new to investing or just curious about how close ended mutual funds work, you’re in the right place. This article will break down everything in simple terms, helping you understand the concept, benefits, risks, and how it fits into your investment journey. Plus, we’ll also touch on some of the best trading courses to help you make smarter choices.
Learn what is close ended mutual fund, how it works, and find the best trading courses for smart investing.
What is a Close Ended Mutual Fund?
A close ended mutual fund is a type of investment scheme that collects money from investors only during a specific period called the New Fund Offer (NFO). Once the NFO ends, the fund is “closed”—meaning no new investors can buy units directly from the fund house. Unlike open-ended funds, you can’t buy or sell units directly with the fund house after the NFO.
Think of it like buying tickets to a concert. Once all the tickets are sold, the box office closes. If you want to go, you have to buy a ticket from someone who already has one. Similarly, if you want to invest in a close ended fund after the NFO, you’ll need to buy units from another investor on the stock exchange.
How Does a Close Ended Mutual Fund Work?
Close ended mutual funds start with an NFO, which is a limited-time window for investors to buy units directly from the fund. After the NFO, the fund is closed, and the units are listed on a stock exchange. Investors can then buy or sell these units like stocks.
Here’s a simple breakdown:
- The fund house launches the scheme and announces the NFO period.
- Investors can buy units during this period.
- Once the NFO ends, no new units are issued.
- Units are listed on a stock exchange, and trading happens like stocks.
This structure gives close ended funds a fixed corpus, which helps the fund manager plan investments without worrying about sudden inflows or outflows.
Open Ended vs Close Ended Mutual Funds
Let’s compare the two types to understand the difference better:
| Feature | Open Ended Funds | Close Ended Funds |
| Entry/Exit | Anytime | Only during NFO or on stock exchange |
| Liquidity | High (can redeem anytime) | Limited (only on stock exchange) |
| Corpus Size | Keeps changing | Fixed after NFO |
| NAV Fluctuation | Based on daily demand | Based on market trading |
| Flexibility | High | Limited |
Open ended funds are like a bus stop—you can hop on or off anytime. Close ended funds are like a train—they only stop at scheduled stations (NFO and stock exchange).
Features of Close Ended Mutual Funds
- Fixed Corpus: The fund size is fixed after the NFO, which helps in stable investment planning.
- Listing on Stock Exchange: Units are traded on stock exchanges after the NFO.
- Limited Entry: Investors can only join during the NFO.
- Maturity Period: These funds have a specific maturity date after which they are wound up.
- Market-Driven Pricing: The price of units is determined by market demand, not the fund’s NAV.
Advantages of Investing in Close Ended Funds
- Stable Investment Environment: The fixed corpus allows fund managers to make long-term plans.
- Potential for Higher Returns: With less pressure from redemptions, managers can focus on growth.
- Diversification: Close ended funds often invest in less liquid assets, giving investors exposure to niche markets.
- Transparency: Units are traded on exchanges, so prices are visible to everyone.
Risks and Limitations of Close Ended Funds
- Liquidity Risk: If there aren’t many buyers or sellers, it can be hard to trade units at a fair price.
- Market Risk: Unit prices can be volatile due to market demand.
- Limited Entry: Once the NFO is over, you can’t invest directly with the fund.
- Maturity Risk: The fund will be wound up after maturity, so you need to plan for the exit.
How to Invest in a Close Ended Mutual Fund?
Investing in a close ended fund is simple:
- Find the NFO: Look for announcements from mutual fund houses.
- Apply During NFO: Submit your application and payment before the NFO ends.
- Wait for Listing: After the NFO, the fund will be listed on a stock exchange.
- Trade on Exchange: You can buy or sell units on the exchange like stocks.
Where Can You Buy Units After the Fund Closes?
After the NFO, you can buy or sell units on the stock exchange. You’ll need a demat account and a trading account to participate. The price will depend on market demand, not the fund’s NAV.
Taxation of Close Ended Mutual Funds
The tax treatment is similar to other mutual funds:
- Equity Funds: Long-term capital gains (held over 1 year) are taxed at 10% (above ₹1 lakh), short-term gains at 15%.
- Debt Funds: Long-term gains (held over 3 years) are taxed at 20% with indexation, short-term gains at your income tax slab.
Always check the specific fund’s category for accurate tax rules.
Are Close Ended Funds Suitable for Beginners?
Close ended funds can be a bit tricky for beginners because of their limited liquidity and market-driven pricing. However, if you’re willing to learn and monitor the market, they can offer good returns. For beginners, it’s best to start with open-ended funds and gradually explore close ended options.
How to Choose the Best Close Ended Fund?
When picking a close ended fund, consider:
- Fund Manager’s Track Record: Look for experienced managers.
- Past Performance: Check how the fund performed in previous NFOs.
- Investment Objective: Make sure it matches your goals.
- Fees and Expenses: Lower fees mean more returns for you.
- Reputation of Fund House: Stick to well-known and trusted companies.
Examples of Popular Close Ended Mutual Funds
Some well-known close ended funds in India include:
- HDFC Capital Builder Fund
- ICICI Prudential Capital Protection Fund
- SBI Magnum Multiplier Plus Fund
Always research before investing, as each fund has unique features and risks.
What Happens When the Fund Matures?
At maturity, the fund is wound up, and investors get their money back based on the fund’s NAV. If you want to continue investing, you’ll need to choose another fund or investment option.
Best Trading Courses for Mutual Fund Investors
If you want to get better at investing in mutual funds (including close ended funds), consider these best trading courses:
- Zerodha Varsity: Free, beginner-friendly, covers mutual funds, stocks, and more.
- Udemy – The Complete Foundation Stock Market Course: Comprehensive, covers trading strategies and mutual funds.
- Coursera – Financial Markets by Yale University: Advanced, ideal for those wanting a deeper understanding.
- NSE Academy – Certification in Mutual Funds: Industry-recognized, covers all aspects of mutual funds.
- Trendy Traders Academy: Practical, hands-on courses focused on trading and investing in India.
These courses will help you make informed decisions and maximize your returns.
Frequently Asked Questions (FAQs)
What is a close ended mutual fund?
A close ended mutual fund is a scheme that collects money only during a specific period (NFO) and then closes to new investors.
How does a close ended mutual fund work?
After the NFO, units are listed on a stock exchange and can be bought or sold like stocks.
What are the advantages of close ended funds?
They offer stable investment planning, potential for higher returns, and diversification.
Are close ended funds risky?
Yes, they have liquidity risk, market risk, and limited entry, but can offer good returns if managed well.
Which are the best trading courses for mutual fund investors?
Zerodha Varsity, Udemy’s Stock Market Course, Coursera’s Financial Markets, NSE Academy’s Mutual Fund Certification, and Trendy Traders Academy are highly recommended.
