Closed-end scheme

Most mutual fund schemes let you invest and redeem on almost any working day, at the day's NAV. A closed-end scheme does not work this way. It is open to new investors only for a short window called the New Fund Offer (NFO), and after that window closes, it does not accept fresh investment or give redemption on demand.

Its units are instead listed on a stock exchange, so an investor who wants to exit before the scheme's term ends has to sell to another investor on the exchange, rather than redeem with the fund itself.

A closed-end scheme runs for a fixed period or tenor, decided when the scheme is launched. Once the NFO ends, the unit capital does not change for the rest of the scheme's life, because transactions between investors on the stock exchange do not affect the fund's own unit capital — only the fund's AUM at market value can change, as the underlying investments rise or fall in price.

When the fixed term ends, the fund itself redeems all units at the prevailing NAV, and the scheme ceases to exist. Interval funds are a variant that becomes open-ended only during specified windows, at least 2 days long with a minimum 15-day gap between windows, otherwise behaving like a closed-end fund the rest of the time.

A fund house launches a 5-year closed-end equity scheme with an NFO running from 1 to 15 June. Ramya invests Rs 2,00,000 during the NFO and is allotted units at Rs 10 each, 20,000 units.

After 15 June, the scheme is closed to new investment. Two years later, Ramya needs cash and wants to exit early. She cannot redeem with the fund directly — instead, she sells her 20,000 units on the stock exchange, where the scheme is mandatorily listed, to another investor at the prevailing market price. Only when the full 5-year term ends does the fund itself redeem every remaining investor's units at the then-prevailing NAV, and the scheme is wound up.

Chapter 11 (Mutual Fund), section 11.3.1, contrasts open-ended and closed-end schemes directly, and section 11.3.2 builds interval funds as a variant of the closed-end structure. Expect a question that asks how an investor exits a closed-end scheme before its term ends — the answer is a stock exchange sale, not redemption with the fund — or one that tests whether the unit capital of a closed-end fund can change mid-term.

• A closed-end scheme's unit capital stays fixed after the NFO — only its market value, AUM at MTM, moves, not the number of units in issue.
• An early exit is a stock exchange sale to another investor, not a redemption to the fund — the price received depends on market demand, not simply on the scheme's NAV.
• Interval funds and FMPs are both variants built on the closed-end structure, but each has its own rules — an interval fund reopens periodically; an FMP runs to a single fixed maturity that matches its underlying debt securities.