Close-ended fund
Also written Closed-ended fund · Closed-end fund · Close ended scheme · Close-ended scheme
A mutual fund scheme that sells units only in its NFO, runs for a fixed period and redeems all units at maturity — in between, investors can exit only by selling on the stock exchange, where listing is compulsory.
In plain language
A close ended fund is a scheme with a beginning and an end. It raises money once, in the NFO, invests it for a specific period, and on the specified maturity date redeems every unit and closes.
Between those two dates the fund is closed for further purchases, and it does not buy units back either. An investor who wants his money early cannot ask the fund for it.
So SEBI has made it mandatory for units of all closed-end schemes to be listed on stock exchanges. The investor sells to another investor, at whatever price the market sets that day — which may be above or below the NAV.
How it works
Because trades happen between investors rather than with the fund, the numbers the registrar tracks behave very differently from an open ended scheme.
Unit capital is fixed for the life of the fund. A purchase or sale on the exchange does not result in new units being issued or existing units being redeemed, so the size of a listed close ended fund stays constant.
The price is a market price. Units trade at a discount or premium to NAV depending on investors' perception. Table 4.1 in the workbook describes the transaction price as a significant premium or discount to NAV, and intra-day trading as possible but expensive, due to bid-ask spreads.
Redemption happens once. In a close ended fund, redemption of units happens only on the maturity date. Units in demat form must be issued to unit holders within 2 working days of their request, which is what makes exchange trading possible for someone holding a statement of account.
The interval fund sits in between: largely close ended, it opens for purchase and redemption during a Specified Transaction Period — and must still be compulsorily listed to give an exit between intervals.
A worked example
Illustrative numbers.
A 3-year close ended debt scheme runs its NFO at Rs 10 per unit and raises Rs 300 crore. It allots 30 crore units; unit capital is Rs 300 crore, and it will stay Rs 300 crore until maturity.
Eighteen months in, Mr Sharma needs money. The scheme's NAV is Rs 12.40, but the units are trading on the exchange at Rs 11.80.
| Working | Amount | |
|---|---|---|
| Value of 5,000 units at NAV | 5,000 × 12.40 | Rs 62,000 |
| What a buyer on the exchange pays | 5,000 × 11.80 | Rs 59,000 |
| Discount to NAV | 0.60 ÷ 12.40 | 4.84% |
He accepts Rs 59,000 — Rs 3,000 less than the value of the portfolio behind his units. The fund issues nothing and redeems nothing; the RTA and depository simply record a new beneficial owner. Unit capital is still Rs 300 crore.
At maturity the NAV is, say, Rs 13.10. The buyer who paid Rs 11.80 is redeemed by the fund at NAV:
5,000 × 13.10 = Rs 65,500
The discount he bought at has closed completely, because on the maturity date the fund, not the market, sets the price.
Why NISM asks about it
Chapter 8 (Basics of Mutual Funds) contrasts the two structures in section 8.3 and Table 8.1; Chapter 4 does the same in Table 4.1 alongside ETFs. Chapter 10 (Mutual Fund Products) defines close ended and interval funds in sections 10.1.2 and 10.1.3, and its first sample question asks when investors buy closed-end funds from the mutual fund — during the NFO. Chapter 14 adds that redemption happens only on maturity, and the turnaround table gives the 2-working-day demat issue.
Common exam traps
- Investors buy from the fund only during the NFO. Not in a continuous offer, and not "at any time in the life of the fund" — both are sample-question distractors.
- Listing is compulsory, precisely because the fund offers no exit before maturity.
- Exchange trades do not change unit capital. No units are created or cancelled when one investor sells to another.
- The exchange price is not NAV. It can sit at a discount or premium; only at maturity is the investor paid NAV by the fund.
- An interval fund is not an open ended fund. It is largely close ended, transacts with the fund only in its Specified Transaction Period, and must also be listed.
- Close ended funds are not illiquid by rule — the workbook presents compulsory listing as the source of their liquidity, though Table 4.1 flags the high cost of bid-ask spreads.
Where this is taught
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series XXI-B · Chapter 6: Mutual Fundsintroduced here
- Series II-A · Chapter 5: Basics of Mutual Fundsintroduced here
- Series II-B · Chapter 8: Basics of Mutual Fundsintroduced here
- Series XXI-A · Chapter 6: Collective Investment Vehiclesintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series II-B · Chapter 10: Mutual Fund Products
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Interval fundA scheme that is largely close-ended but opens for subscription and redemption during pre-specified transaction periods, with compulsory stock exchange listing to give an exit in between.
- New Fund OfferThe period in which a mutual fund scheme's units are offered to the public for the first time, at a fixed NFO price rather than at NAV, and during which the registrar builds the scheme's first register of investors.
- Open-ended fundA mutual fund scheme with no maturity date that keeps selling and redeeming units directly after its NFO, at NAV-linked prices, so its number of units and unit capital change every day.
- Unit capitalThe number of units a mutual fund scheme has issued multiplied by their face value — an accounting figure that records what investors contributed, not what their holding is worth today.
- Secondary marketThe market where securities already issued are traded between investors — the money goes to the selling investor, not to the company, and the issuer's capital is unchanged.
- Dissolution PeriodThe period after an AIF scheme's liquidation period, entered with 75%-by-value investor approval, to sell unliquidated investments — ending in mandatory in-specie distribution of whatever remains.
- Redemption GateA limit, set by the manager in the PPM, on the maximum amount investors can redeem from a Category III AIF in each redemption period — over and above expenses, taxes and exit load.
- Closed-end discountThe gap by which units of a listed close-ended (or interval) scheme trade below their NAV on the stock exchange. The workbook says there is no limit to it; it tends to narrow as maturity approaches.
- On-going offerThe continuous, post-NFO period in which an open-ended scheme sells and redeems units at NAV-linked prices on an ongoing basis — the pricing mechanism the workbook shows keeps every investor's holding fair.
- Tenure of a SchemeThe life of an AIF scheme — from the date of first close to the last date of its term in the fund documents — fixed when SEBI is applied to, a minimum of 3 years, and extendable by 2 with two-thirds investor consent.
- UnitThe share of a mutual fund scheme that an investor's money is translated into — typically carrying a face value of Rs 10, and worth whatever the scheme's NAV is on the day.
- Fixed Maturity PlanA close-ended debt scheme whose portfolio maturity is aligned to the scheme's own maturity date, so the investor who stays to the end has a reasonably visible outcome — though never a guaranteed one.
- Scheme Re-Opening DateThe date after an open-ended scheme's NFO from which investors can buy new units or sell units back to the scheme at NAV-based prices. Close-ended schemes have no re-opening date.