Closed-End Fund

What is the Closed-End Fund?

A closed-end fund is a type of professionally managed fund having a defined portfolio (the combination of more than one script) based on a fixed number of shares issued at an initial public offering, listed on the exchange for trading in the secondary market and are not redeemable from the funds.


Closed-End Fund

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How does it Work?

  • They have several features that make it popular among its class. These are similar to exchange-traded funds or mutual funds. These funds are maintained by investment advisors, run by expert management who initiates trading on a set portfolio.
  • They charge some fees, which in turn yield revenue to investors in the form of capital gain. This is categorized as an investment company that is accessible by the general public for investing.
  • Both the portfolio and portfolio manager needs to be registered with the securities and exchange commission and comply with exchange guidelines/requirements.
  • As per the rules of the security exchange commission, it can be launched only by way of an initial public offering open for a short period (2-10 days) as allowed by exchange rules, as permitted.
  • Afterward, these funds are treated as shares and are traded in the stock market as equity scripts. The price of the fund can be more or less than the initial public offering price depending on the demand and supply in the market.

Closed-End Funds Example

  1. HDFC Equity Opportunities Fund – It’s a large-cap closed-end fund maturing in July 2020 corpus of 1118 crore traded at 9.85 against 10.65 NAV with an 8.1% discount.
  2. ICICI Prudential Value Fund – It is a valuable fund with assets of 1779 crore attaining maturity in June 2021, traded at 9.2 against 10.38 NAV with a 12.8% discount.
  3. Units of ICICI Prudential Bharat Consumption Fund – It is a series II fund with assets of 267 crores traded at 8.79 against 9.91 NAV with a 12.9% discount.

How to Invest in the Closed-End Fund?

  • Investment in closed-end funds can be made directly in markets or through agents. It can also be done by contacting mutual fund distributors and asking them necessary formalities and forms and applications which need to be completed. Before investing, an investor must ensure that he is investing through a distributor registered with the association of mutual fund, which deals in such funds having ARN number allotted by the association.
  • If investment needs to be made through a direct plan, then a financial advisor is required, which is available through distributors. Still, there is no need to pay any commission to the distributor for the advisory services. Distributer must disclose all the tariffs commissions and charges payable to them for all available schemes.
  • The investor can invest directly by visiting closed-end funds, mutual funds branches, or through online websites. Physical forms can be submitted to agents and distributors who provide such services.

Before investing, the investor must check the track record of funds and schemes and refer to product labeling.

Labeling must contain –

  • Nature of scheme
  • Investment objective
  • Level of risk
  • Scheme information documents


  1. Stability – These are stable with their asset base. At the time of NFO, these funds gather a vast asset base. The fund manager is at minimal risk of asset redemption and the occurrence of the change in the asset. These funds can be invested in other financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as more, equity, or debt securities.
  2. New Opportunities – It allows investors to invest in a wide range of new and creative strategies.
  3. Freedom from Large Flows – There is no risk of massive inflows and outflows in closed-end funds. Investor money is locked until the time of maturity. As a result, the fund manager is capable of making rational decisions.
  4. Enhanced Flexibility – The investor is free to sell the fund and liquidate his position as per rules made by the fund house. These units can be sold in the market during trade hours.
  5. The fund managers can create a unique Portfolio – An impressive portfolio to earn better returns.
  6. Trading on Stock Exchanges – Investors are allowed to trade units of their closed-end fund on a stock exchange. Prices may vary from the net asset value of funds.


  1. Cost – Subscriber has to pay massive fees on buying or selling unit,
  2. Subscribing Option – Can be purchased only through brokers or intermediaries.
  3. Prompt Changes – Portfolio under such funds are subjected to rapid changes that are usually unpredictable.
  4. Liquidity – These funds offer less liquidity as compared to open-end funds.
  5. Pricing – Discounting factorsDiscounting FactorsDiscount Factor is a weighing factor most often used to find the present value of future cash flows, i.e., to calculate the Net Present Value (NPV). It is determined by, 1 / {1 * (1 + Discount Rate) Period Number}read more may lower the price of the closed-ended funds.


  • This can be described as a type of professionally managed fund containing a fixed proportion of scripts within itself (a defined portfolio) offered during the initial public offering and cannot be redeemed from the funds but can only be traded in secondary markets.
  • This funds offer broad benefits like providing stability, flexibility, fixed non-redeemable funds, unique portfolio, and exchange trading options but also have shortcomings like locking of funds which cannot be redeemed from funds (one can get out by trading on the secondary market), cost of subscribing is more as specific fees need to be paid to portfolio managersPortfolio ManagersA portfolio manager is a financial market expert who strategically designs investment more, the unpredictability of markets, limitations in subscribing options.

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