Mutual funds are currently one of the most in-demand investment options. A mutual fund pools investors’ money across a portfolio of securities, earning a good return on their investments. Also, it is a less risky option than equity stocks. Owing to digitization, one can now easily invest in mutual funds online.
Based on their maturity periods, mutual funds are categorized as close-ended mutual funds and open-ended mutual funds. Open-ended schemes are quite popular with investors. With investors now wanting to explore investment prospects, close-ended mutual funds are considered a better bet for investors having long-term investment goals.
What is a close-ended Mutual Fund?
According to the Securities and Exchange Board of India (SEBI), close-ended funds are mutual funds with a time-specific maturity period. Close-ended mutual funds are available for subscription within a certain New Fund Offer (NFO) period when the scheme is being launched.
How Does a Close-ended Mutual Fund Function?
As per SEBI guidelines, a mutual fund that gets launched via the NFO can be kept open for a maximum period of 30 days. During this NFO period, interested investors can invest in close-ended mutual fund units at a specific price. Investors, who have opted for the close-ended mutual fund scheme, cannot exit the scheme before its maturity period. On the expiry of the NFO period, new investors cannot enter the said mutual fund scheme.
On maturity, the close-ended mutual fund schemed stands dissolved, with the investors getting back their money invested at the prevailing Net Asset Value (NAV) on the maturity date. The typical maturity period of a close-ended mutual fund is between three to seven years.
Option for Exiting Close-ended Mutual Fund before Maturity Period
SEBI allows exiting the close-ended mutual fund scheme before the maturity period, provided the mutual fund is listed on a stock exchange, or the mutual fund house offers investors the option to sell the units to them, via periodic repurchase at NAV price.
Investors, who want to exit the mutual fund scheme before the maturity period, can exit only through either of the above two options.
As such, close-ended mutual funds function similar to an exchange-traded fund.
Key Benefits of Close-ended Mutual Funds
- Stable asset base
A close-ended mutual fund cannot be redeemed before the maturity period. This enables mutual fund managers to develop a stable asset base, with the best investment strategy. Maintaining liquidity is also not a concern owing to no unexpected inflow/outflow in a close-ended mutual fund scheme, thus aiding fund managers in undertaking rational investment decisions.
- Maximum returns via a unique portfolio
Close-ended mutual funds enable fund managers to explore opportunities such as undervalued debt and equity securities, thus creating a unique mutual fund portfolio, garnering maximum returns. Also, the lock-in period of a close-ended mutual fund binds the investor from taking risky investment decisions, thus increasing their chances of getting maximum returns on their investment.
- Trading through stock exchange
Close-ended mutual fund units held by investors can be traded through the stock exchange like shares on real-time prices. Thus, the price of this mutual fund is driven by the demand and supply factor, with the units being traded at premiums or discounts to their NAVs.
Conclusion
Investors looking for a long-term investment horizon or a diverse investment portfolio can opt for close-ended mutual funds. Investors can invest through direct mode or registered mutual fund agents/distributors via offline or online mode. The performance of a close-ended mutual fund depends on key variables such as the fund manager’s investment strategies, sectors invested, and the existing market scenario. You can explore various mutual funds on Kotak Mahindra Bank website.
