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What is a close-ended fund?

In the world of mutual funds, you've likely encountered terms like equity funds, debt funds, and even hybrid options. But have you come across close-ended funds? These funds operate differently from their open-ended counterparts, and understanding their unique traits can help you make informed investment decisions.

So, what is Close Ended Fund (CEF)? In simple terms, it's like an having a limited number of investors. Unlike the open-ended model – where you can invest and exit at any time – a CEF raises a fixed amount of investment through an New Fund Offer (NFO) and then ‘closes’ its doors to new investors.

Delving more into the closed ended fund meaning – once the new fund offer ends, the number of units in a CEF remains static. You can only buy and sell existing units on stock exchanges, similar to trading stocks. This unique structure brings both advantages and potential drawbacks to consider.

Here's the upside of investing in CEFs:

Reduced volatility: CEFs are less susceptible to daily market fluctuations and investor panic, as their size is determined immediately on closure of new fund offer and there can be no fresh inflow/outflow. This can lead to a smoother return potential compared to some open-ended funds.

Specialised investing: CEFs can focus on specific asset classes or niche sectors, allowing you to access unique investment opportunities that might not be available in regular mutual funds.

However, before jumping in, be aware of the potential downsides:

Limited liquidity: Unlike open-ended funds, trading CEFs happens on secondary markets, which can sometimes lead to lower liquidity and difficulty in buying or selling units at your desired price.

Trading premiums or discounts: The price of CEFs on the exchange can trade above or below their Net Asset Value (NAV), which is the actual value of their underlying assets. This adds an additional layer of volatility and complexity.

So, who should consider investing in CEFs?

Investors with a long-term horizon:

CEFs are suited for those who can withstand potential short-term volatility and ready to wait untill maturity.

Risk-tolerant investors: The potential for higher returns comes with greater risks, so you should be comfortable with the possibility of losses.

Investors seeking niche exposure:

CEFs offer access to specific sectors or strategies that might not be readily available elsewhere

Close-ended funds offer a distinct investment avenue with both advantages and disadvantages. Understanding the close-ended fund definition, their unique characteristics and how they fit your risk tolerance and investment goals is crucial before taking the plunge. Consulting a financial advisor can provide valuable guidance for navigating this specialised corner of the investment landscape.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.