There are several forms of investment vehicles available for investors to safeguard their hard-earned money. Investment instruments rolled out by banks, post offices, financial institutions, companies and so on. Amongst them, one such kind of investment which has gained popularity over the last few years is Mutual Fund.
A Mutual Fund is one of the investment vehicles which pools money from several individuals and invests in equities, bonds, money market instruments and other forms of securities. The basket of several forms of investment is known as a portfolio. A portfolio represents a range of sectors and companies.
There are several types of mutual funds available in the market. Closed-End Mutual Funds are one amongst them.
Let's understand in detail about the Closed-End Funds.
What is a Closed-End Mutual Fund?
The Closed-End Mutual Fund is one of the kinds of mutual fund that garners resources from several investors by the issue of New Fund Offer (NFO).
Usually, investors will purchase units of the fund during the NFO period. Each of the units will be sold at a price. The rate of each unit will be solely based on the Net Asset Value (NAV) of the mutual fund launching the NFO.
In the case of Closed-End Mutual Fund, the unit capital will be fixed and a specified number of units will be sold. Unlike an open-ended fund, an investor will not be able to purchase the bunch of the closed-ended fund after the completion of the NFO period.
Once the investor invests in closed-end funds, a new investor can neither enter nor the existing investor can exit the fund until the completion of the scheme tenure. But to provide a platform for an investor to exit before the completion of the term, the fund houses lists their closed-ended schemes on a stock exchange.
How Do a Closed-End Funds Work?
Once an asset management company rolls out a New Fund Offer (NFO), an investor will purchase units of the fund at a fixed price. Once the NFO period is over, no new investor will be able to enter the fund nor the existing ones can leave before the maturity period. Usually, the maturity period ranges from 3 - 4 years.
Those investors who opt to exit fund ahead of maturity can trade their units on stock exchanges. The prices of the unit which trade in the stock exchanges change according to the performance of the investment portfolio in the scheme and market fluctuations. At times these closed-end funds do trade at a discounted price on their Net Asset Value (NAV).
Benefits of Closed-End Funds
Closed-End Funds offer investors to invest in innovative and new strategies which are not present in the open-ended funds.
Closed-End Funds offer stability in terms of asset valuation. During the new fund offer period, the closed-ended funds accumulate a rigid asset base.
At this time, fund managers need not have to bother about the changes in the total assets of the fund or further redemptions. They can invest in any of the debt or equity or other financial instruments based on the market movements.
Stock Exchange Trading
Closed-End Funds provides an opportunity for the investors to trade their units on stock exchanges. The trading price will be either above or below the Net Asset Value (NAV) of the fund.
Immunity from Large Flows
Closed-End Funds are immune to immense inflow as well as the outflow of funds. An unexpected gush of money from the fund will force the fund manager to take an impulsive decision and sell the instruments at low prices. The lock-in period of the closed-end funds allows the fund manager to make rational decisions.
Who Should opt for a Closed-End Funds?
Investors who are planning to an investor for long-term should go for Closed-End Funds. The amount parked in these funds cannot be utilized until the maturity period as the lock-in condition of the fund will neutralize the possibility of an impulsive decision made by the investors when markets are volatile.
The lock-in period offered in the closed-end funds until maturity will ensure that investors will make an adequate capital gain on their investment decision. Those individuals who are looking for diversifying their portfolio can consider parking their funds in these closed-end funds owing to the unique features it offers to investors.