What are Close-Ended mutual funds?
What are Close-Ended Mutual Funds?
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The category of mutual funds whose unit capital is fixed and are traded on the stock exchange after being issued in the Initial Public Offer (IPO) is considered as close-ended mutual funds.
Like open ended funds, these also fall under the care of professional fund managers and hold the status of publicly traded investment companies while the trading is done just like in case of securities being traded on the secondary market. But only the factors of demand and supply govern the close ended mutual funds since these cannot be bought back.
The determination of price of a close ended mutual fund is the part which often develops a confusion among the would be investors. The price is based on the demand and supply as well as the additional factors like the change in assets held in the portfolio.
- Pros
- Better Diversification
- Active Management
- Industry/Area/Sector Centered Benefits
- Usually Higher Returns
- Stability for the fund managers
- Cons
- May be traded at discount due to volatility
- Better Liquidity in open-ended funds
- To be bought through brokers
- No continuous investment option
- No previous performance history
- Management Fee
- Only lump sum investment option
- No Redemption Option
- Tax on gains dependent on asset allocation among debt & equity
- No entry for new investor
Myths and risks associated with close ended-funds
- A Close ended fund is a standard mutual fund.
- A close ended fund is an ETF.
- Share performance is the best indicator of a closed-end fund.
Market Risk
Interest Rate Risk
Liquidity Risk
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