Close Ended Mutual fund
In a close-ended mutual fund scheme, the capital of the units is fixed. Therefore, only a specific number of units are sold at any time. Every investor has a term period and new customers cannot enter or existing ones cannot exit the fund, until the tenure is over. Here the investments are made directly in the fund and each investment has a stipulated maturity period. The market price of the funds may vary from its Net Asset Value (NAV) based on the demand and supply situation or other market changes. Usually close-ended schemes are sold at a price lesser than the NAV.
Why close-ended schemes?
In some investment schemes the investors may quickly redeem their fund thus gain an advantage over it. This may affect long term investors. But a close-ended scheme does not allow such feasibility. It has a pre specified mandatory period called the “lock-in”. After this period the scheme may either become open-ended or return the investments to the investor, based on the NAV of it.
Benefits of close-ended schemes
- When the investment is made at a time where the share price is lower than the NAV, then a bonus is received while you sell the shares. Given that the interval between the share prices and its NAV narrows after investment.
- They pay investors with higher levels of income, as investments are made on higher income producing assets.
- The cash will not have to meet any sudden redemption, thus it offers the investors high levels of confidence and trust.
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- Mutual Funds in India
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- Open Ended Mutual Fund Scheme
- Close Ended Mutual Fund Scheme