How do close-ended funds work?
Unlike an open-ended fund, investors cannot buy units of close-ended mutual funds after its NFO period is over. Therefore, close-ended mutual funds work very similar to stocks as units can only be purchased and sold on a recognised stock exchange once the NFO period ends.
What close-ended mutual funds similar to open-ended funds?
The main difference between the two these is the number of outstanding units held by them.
An open-ended fund manager would buy and sell as investors enter and exit, thereby, considerably changing the number of outstanding units. A close-ended fund comes with limited units. The price in an open-ended fund is decided on the basis of the total value of assets held under the fund whereas a close-ended fund doesn’t permit new units because only a fixed number of units are issued during its initial public offering.
The objective of a close-ended fund is to raise money via an IPO so it can be traded in the open market just like a stock or an ETF. The NAV does determine the value, however, the actual price of the fund is driven by the demand and supply.
The Bottom LineThe securities in a close-ended fund are pre-decided thus creating a ‘stable’ portfolio. Panic due to low market liquidity or redemption pressure does not affect its performance. Open-ended funds seem like a safer choice compared to close-ended funds, but close-ended funds may give better returns combining both dividend payments and capital appreciation. Before you invest you need to carefully assess the products offered as one product can be riskier than the other.