Last Updated on May 8, 2025 by vanessa sequeira
Mutual funds are one of the most sought-after investment options. The money contributed by individual investors is pooled and used to purchase different types of securities. This is a diverse portfolio of securities and is tailored according to the investment objectives.
On the basis of the subscription period, mutual funds can be classified into two categories: close-ended mutual funds and open-ended mutual funds. In a close-ended mutual fund, a fixed number of units are issued, which are traded on the stock exchange. A closed-end fund works like an exchange-traded fund (ETF). In this article, we dive deeper into how a close ended mutual fund works and its pros and cons.
Table of Contents
List Of Close-Ended Funds In India
Based on the performance over the last 5 years, here is a small list of some close-ended mutual funds operational in India:
- SBI Tax Advantage Fund – Series III – Regular Plan
- ICICI Prudential Growth Fund – Series 2
- SBI Tax Advantage Fund – Series II
- ICICI Prudential Growth Fund – Series I
- ICICI Prudential R.I.G.H.T. Fund
How Does A Closed-Ended Mutual Fund Work?
According to the SEBI guidelines, a mutual fund is to be launched through a New Fund Offer, which can be open for a maximum of 30 days. The closed mutual fund schemes are then traded in the open market like shares. The demand and supply forces of the market regulate the price of the fund.
With closed-ended mutual funds, only a fixed number of units of the mutual fund are released in the market. The units of such a mutual fund can be purchased only during the NFO period. The units can be redeemed only after the maturity of the fund. This is generally between 3 to 7 years. This helps the fund manager to freely use the funds to attain the overall objective of the mutual fund.
Units of close-ended mutual funds can be purchased only during the NFO period Click To TweetDifference Between Close Ended And Open Ended Mutual Funds
| Parameter | Open-Ended Mutual Funds | Close-Ended Mutual Funds |
| Structure | Perpetual fund with no maturity | Fixed maturity period |
| Subscription Window | Investors can enter or exit anytime | Can invest only during the New Fund Offer (NFO) |
| Liquidity | Highly liquid; units can be redeemed anytime | Limited liquidity; traded on stock exchanges |
| Pricing | Based on Net Asset Value (NAV) | Traded at market price, which may differ from NAV |
| Fund Size | Flexible; changes with inflows/outflows | Fixed corpus post-NFO |
| Transparency | NAV declared daily | NAV declared regularly, but may have lower visibility |
| Fund Manager Flexibility | May need to manage inflows and outflows | More flexibility as corpus is locked-in |
Features Of Closed-Ended Mutual Funds 2025
- Fixed Tenure: Closed-end funds for SIP come with a pre-defined maturity period, typically ranging from 3 to 5 years. Once invested, units cannot be redeemed before maturity (unless sold on exchanges).
- NFO-Based Investment: These funds can only be subscribed to during the New Fund Offer (NFO) period. Post-NFO, they are listed on stock exchanges for trading.
- Listed on Exchanges: Units are listed on recognised stock exchanges like the NSE or BSE, allowing investors to buy/sell before maturity, although at prevailing market prices.
- Stable Asset Base: Since the fund corpus is fixed post-NFO, fund managers face fewer redemption pressures and can adopt long-term strategies.
- Potential for Capital Appreciation: Due to the lock-in period, fund managers can focus on potentially high-return assets that may require time to realise gains.
- NAV Disclosure: NAV is published periodically, allowing investors to track fund performance even during the lock-in period.
Types Of Close-Ended Mutual Fund
- Equity Close-Ended Funds: These closed-end equity funds invest mainly in equities and aim for long-term capital growth. The lock-in period allows fund managers to take strategic positions without redemption pressure, making them suitable for high-risk, long-term investors.
- Debt Close-Ended Funds: Focused on fixed-income instruments like bonds and government securities, these funds aim to deliver stable returns with lower risk. They’re ideal for conservative investors seeking predictable income over a fixed term.
- Hybrid Close-Ended Funds: These funds combine equity and debt to balance risk and return. They offer growth from equities and stability from debt, making them suitable for investors with a moderate risk profile.
- Fixed Maturity Plans (FMPs): FMPs invest in debt instruments with a maturity aligned to the fund’s tenure. They’re popular for their tax efficiency and predictable returns when held till maturity, though they are not risk-free.
Advantages Of A Close-Ended Mutual Fund
There are many advantages of investing in closed-ended funds.
- Stability: The best closed-ended mutual funds can be redeemed only on the expiry of the maturity period. This helps the fund managers to build a stable asset base, and employ the right investment strategy. The worry of maintaining liquidity is absent due to the lock-in period.
- Demand and supply based market price: Just the way market forces decide upon stock price, the NAV of a closed-ended scheme is determined by the demand and supply of the units. So, if the demand for a particular closed-ended scheme goes up and the supply remains low, then the units would fetch a higher price, over and above the NAV of the particular scheme. This helps in compounding money in the investment over time.
- Liquidity and flexibility of decision-making: Some closed mutual funds with high returns provide an option of selling your mutual fund units back to the mutual fund house through periodic repurchase at NAV-related prices. SEBI regulations dictate that fund houses provide at least one of the two exit routes for investors; the repurchase facility or through listing on stock exchanges.
Disadvantages Of A Close-Ended Mutual Fund
Some of the disadvantages of investing in closed-ended funds are as follows.
- Lackluster performance: The returns are not comparable to an open-ended fund. While the fund gets listed on the stock market soon after the NFO, should you require money in the short term, the buyers are so few that you may end up paying a premium over the purchase price, which fails the point of investing at all.
- Lump-sum investment amount: Some of the top-performing closed-end funds require you to invest a lump sum at the time of their launch. This can be a risky decision regarding your investments. This exposes you to bigger bets than otherwise warranted. Moreover, a huge section of the salaried class of investors is not comfortable with lump sum investments in terms of affordability and risk.
- Historical data unavailable: When it comes to open-ended funds, investors can review the performance of the funds over different market cycles because of the availability of historical data. However, in the case of closed-ended funds for growth, the historical record is unavailable. Thus, investment in a closed-ended fund attracts unprecedented risks and uncertainties, and you will have to depend on the fund manager completely for any analysis.
Who Should Invest In A Close-Ended Mutual Fund?
Close-ended funds need a lump sum investment and do not offer a redemption option until maturity. Hence, investors with ready and investable capital and an investment horizon that aligns with the maturity date of the scheme can opt for best closed-ended mutual funds. Further, the risks and returns should be carefully assessed, based on the asset allocation of the scheme.
Tax On Gains From Closed-Ended Funds
Equity and debt funds have different taxation schemes. Therefore, in the case of close-ended mutual funds, the tax rates depend on the percentage of investments made by the scheme in equity and debt.
- If the fund has invested 65% or more of its total assets in equity and equity-related instruments, then it is treated as an equity fund for taxation purposes.
- If the fund has invested at least 65% of its total assets in debt instruments, then it is treated as a debt fund for taxation purposes.
Make sure to go through the offer document carefully, and check the asset allocation that the scheme holds to understand the tax rates.
To Wrap Up
The stability that top closed-end mutual funds offer are attractive to investors who seek to generate wealth over the long term. Although the returns are lower than open-ended mutual funds, flexibility for the investors is taken care of. It is important to remember that close-ended mutual funds require a lump sum payment which cannot be redeemed until maturity, and so investors should make a decision after assessing if their needs align with the terms, risks and benefits associated with close-ended mutual funds.
Frequently Asked Questions (FAQs) Around Close Ended Mutual Funds
Do closed-end funds expire?
Yes, closed-end mutual funds come with a fixed maturity period, typically ranging from 3 to 5 years. Once the fund reaches maturity, it either gets liquidated and the proceeds are paid out to investors, or, in some cases, it may be converted into an open-ended fund, depending on the scheme’s structure.
Which is better: open-ended or closed-ended mutual funds?
Neither is inherently better—each suits different investor needs. Open-ended funds offer flexibility and liquidity, making them ideal for investors who prefer the option to enter or exit anytime. Closed-ended funds, on the other hand, provide a stable asset base for the fund manager and may suit investors with long-term goals who don’t need immediate liquidity. The choice depends on your investment horizon, risk appetite, and liquidity preferences.
Can I redeem my investment in a close-ended mutual fund before maturity?
No, close-ended fund units cannot be redeemed before maturity. However, they can be sold on stock exchanges at market prices.
Are close-ended funds suitable for long-term investment?
Yes, close-ended funds are designed for fixed tenures, making them suitable for investors with long-term goals who can stay invested till maturity.
