Closed End Mutual Funds – Meaning, Features, Benefits & How they work

Everyone is coming across mutual funds lately. Some elements and terminologies in mutual funds could be hard for the common man to understand. Well, if you are wondering if it is important for everyone to know those terminologies and why not just dive into the investment process, you might just be wrong. Before you can start investing in mutual funds, you must get ahead of the market and understand these terms. One such phrase we will be talking about today is “close-ended funds”.

Here, you can find answers to everything you need to know about close-ended mutual funds. So, let’s get started.

Overview of Closed-End Mutual Fund

Closed-end funds are one of the most interesting investment products for people looking to diversify their portfolios. They have unique characteristics that distinguish them from open-ended funds and other investment vehicles. This article explores closed-end funds’ concept, working, benefits, and considerations.

What Is a Closed-End Fund?

Let’s define close-ended mutual fund here for your understanding –

A closed-end fund is a type of mutual fund with a fixed sum of shares issued at the time of an initial public offering. The stock sold to investors is traded on stock exchanges, meaning that in comparison to open-ended funds, there are no units that investors can buy or sell continuously. Once the fund is launched, no new shares are issued, and investors can only buy or sell shares in the secondary market.

How Do Close-Ended Funds Work?

Closed-end funds work on a different model than their open-ended cousins:

• Fixed Capital Structure: The fund raises a fixed amount of capital during its IPO and does not accept additional investments post-launch.
• Stock Exchange Trading: After the IPO, shares are listed on stock exchanges, and investors can trade them at market-decided prices.
• Portfolio Management: Fund managers actively manage the portfolio to achieve the fund’s investment objectives.
• Price Determination: The market price of a closed-end fund’s shares may vary from its Net Asset Value because of supply and demand dynamics.

Benefits and Drawbacks of Closed-End Funds

Before you can invest in a close-ended mutual fund, you should get started with factors such as its pros and cons. This will help you understand the risks and opportunities while investing in funds like this:

Make sure you understand both sides of a closed-ended mutual fund.

Who should invest in a Closed-End Fund?

Closed-End Funds are for:

• Long-Term Investors: They hold on to the investments until the maturity of the fund.
• Experienced Investors: Those familiar with trading on stock markets and comfortable with fluctuating prices.
• Strategic Investors: These are those seeking opportunities to acquire units at a discounted price relative to the net asset value.
• Goal-Oriented Investors: Investors with specific financial goals aligned with the fund’s tenure and objectives.

This is a generalized viewpoint on who should invest in these funds. The suitability of investing in a closed-end fund would differ from one person to another since everyone has different investment goals and risk tolerances.

How to Invest in Closed-End Funds?

The process of investing in a closed-end mutual fund could vary from an open-ended one. Therefore, follow the steps mentioned below so you do not end up making any mistakes in the process of your investment:

1. Through an IPO: Purchase shares during the fund’s initial public offering.
2. Stock Exchanges: After the IPO, buy or sell shares on stock exchanges through a trading account.
3. Research: Evaluate the fund’s objective, management team, and historical performance.
4. Consult Advisors: Seek guidance from financial advisors to align investments with your goals.

Here are some of the well-known closed-end funds in 2024:

Disclaimer: Please do proper research or consult a financial advisor before investing.

Conclusion

Understanding closed-end mutual funds is a stepping stone to mastering mutual fund investments. The type of mutual fund you invest in is quite important for your financial well-being. Therefore, make sure you choose funds after consideration and knowledge of their working, risks, and investment objectives for the best outcome.

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