Closed-ended AIF
Also written Close-ended AIF · Closed-ended fund structure
An AIF scheme offered for a limited period, funded by commitments drawn down through capital calls, with no redemption before the fund winds up — compulsory for Categories I and II.
In plain language
A closed-ended fund is a door that opens once. Investors come in during the fund-raising period, commit an amount, and then stay until the fund is wound up.
The reason is the assets. Category I and II AIFs invest mainly in unlisted companies, and those investments are illiquid — they cannot be sold at a sensible price on demand. Investors are meant to receive cash only when a portfolio company is actually sold. A fund that let investors redeem at will would be forced to dump holdings at the wrong moment.
So investors do not hand over the whole amount on day one. They make a capital commitment, and the manager calls it as investments are found.
How it works
Who must be closed-ended. Category I and Category II AIFs, compulsorily. Category III AIFs may choose either structure at registration.
Raising and drawing capital. Offered for a limited period set out in the PPM. Investors commit; the manager issues capital calls over the commitment period. The workbook gives two descriptions of that period: Chapter 8 says commitment periods typically range from 3–5 years from the final closing date; Chapter 17 says the commitment period is usually the first three years of the fund tenure. After the final close a closed-ended AIF cannot accept more investors.
Redemption. Not permitted before winding-up, except in extraordinary circumstances. Chapter 8 says most AIFs have a lock-in of 1–2 years, after which investors may exit by paying an exit load; Chapter 7 notes that a 2-year lock-in is prevalent though not mandated by the regulations, and that exit load after lock-in ranges 0–5% of NAV.
Tenure.
| Category I and II | Category III (closed-ended) | |
|---|---|---|
| Minimum tenure | 3 years, from first close | None prescribed |
| Extension | Up to 2 years, with two-thirds of unit holders by value | Up to 2 years in two 1-year extensions, each with two-thirds by value |
| Without consent | Fully liquidate within one year after tenure ends | Wound up |
For Category I and II, first close must be achieved within 12 months of SEBI's communication taking the PPM on record.
Listing. Units of a closed-ended scheme are eligible for listing — voluntarily — with a minimum tradable lot of Rs 1 crore, only after final close. Angel fund units cannot be listed.
Other consequences. NAV is disclosed quarterly. Performance fees are payable only on liquidation if the fund is closed-ended. The mandatory exit option on a material change or change of control applies to closed-ended funds.
A worked example
The workbook's Example (Chapter 17). Fund LMN is a closed-ended Category III AIF with a 5-year tenure. It files its PPM with SEBI on 1 June 2023, receives SEBI approval on 15 September 2023, and launches LMN Growth Fund I with commitments of Rs 300 crore.
| Event | Date |
|---|---|
| First close declared | 15 November 2023 |
| Tenure starts | 15 November 2023 |
| Tenure ends | 14 November 2028 |
| First extension (if approved) | to 14 November 2029 |
| Second extension (if approved) | to 14 November 2030 |
On 14 November 2028 the net assets are Rs 600 crore. To extend, the manager must obtain approval, before that date, from investors holding units worth at least Rs 400 crore — two-thirds of Rs 600 crore by value. Approval is sought one year at a time, and at most two extensions are allowed.
The lock-in, illustrated. An investor in a 5-year closed-ended scheme with a 2-year lock-in (the workbook's Chapter 8 example) cannot exit in years 1 and 2. In years 3 to 5 she may exit, paying the exit load set in the PPM — say 3% of NAV (illustrative) on a holding worth Rs 1.4 crore, or Rs 4.2 lakh.
A date to check. The workbook says Fund LMN must declare first close on or before 31 May 2024 — twelve months from the PPM filing date. The Chapter 17 rule for Category I and II counts twelve months from SEBI's communication (here 15 September 2023). Know both; for a Category I or II question use the rule.
Why NISM asks about it
Chapter 8 (Alternative Investment Fund Structuring), section 8.5 describes the closed-ended structure and its lock-in example; Chapter 7 covers lock-in and exit load; Chapter 17 (Regulatory Framework), sections 17.3 and 17.6 carry the compulsory structure, tenure, extensions and listing, with the Fund LMN example; Chapter 15 applies the mandatory exit option to closed-ended funds. Expect questions on which categories must be closed-ended, the 3-year minimum tenure, the two-thirds extension rule, and listing conditions.
Common exam traps
- Categories I and II must be closed-ended; Category III may be either.
- Commitment period: two descriptions. 3–5 years from final close (Chapter 8) versus usually the first three years of tenure (Chapter 17).
- Minimum tenure of 3 years applies to Categories I and II only. Category III has none prescribed.
- Extension is two-thirds by value, not by number of investors — and the mandatory exit option waiver on a material change is a different threshold, 75% by value.
- Category III extensions come as two separate 1-year extensions.
- Listing is voluntary, only after final close, with a Rs 1 crore minimum lot; angel fund units cannot list.
- Lock-in of 2 years is common but not mandated by the AIF Regulations.
- Tenure runs from first close, not from registration or final close.
Check yourself
1.What is the typical commitment period for a closed-ended AIF?
- a)3 to 5 years from the final closing date
- b)1 year from SEBI registration
- c)10 years from the first close
- d)There is no commitment period in a closed-ended fund
Show the answer
Answer: (a) 3 to 5 years from the final closing date
Closed-ended funds require investors to make a capital commitment from time to time, within the specified commitment period. Commitment periods for closed-end funds typically range from 3-5 years from the final closing date. Note the reference point — from the final closing date, not from first close or from registration. The chapter also gives the typical lock-in: most AIFs in industry would have a lock-in period of 1-2 years, post which investors would be permitted to redeem their capital by paying an exit load. And the general rule: closed-end funds do not permit redemptions of capital at any time prior to the expiration of the fund, except in extraordinary circumstances.
2.Which statement about lock-in and exit load in an AIF is correct?
- a)SEBI mandates a 2-year lock-in for all AIFs and caps exit load at 2 per cent
- b)A closed-ended AIF generally has a minimum tenure of 3 years; a 2-year lock-in is prevalent market practice but is not mandated by the AIF Regulations; and exit load after lock-in can range between 0 and 5 per cent of NAV
- c)Exit load is charged on redemptions made during the lock-in period
- d)Redemption gates specify the minimum amount an investor must redeem in each period
Show the answer
Answer: (b) A closed-ended AIF generally has a minimum tenure of 3 years; a 2-year lock-in is prevalent market practice but is not mandated by the AIF Regulations; and exit load after lock-in can range between 0 and 5 per cent of NAV
Three separate facts, each of which gets misstated in questions. A closed-ended AIF generally has a minimum tenure of 3 years. A 2-year lock-in, although not mandated by the SEBI (Alternative Investment Funds) Regulations, may be prevalent for most funds. On the load: Exit Load is the additional fees charged to investors, on redemptions made after completion of the lock-in period but before the expiration of stated fund tenure... exit load charged by Manager of AIF can range between 0 to 5 percent of the NAV of the fund. So option (c) reverses the timing — during lock-in you cannot redeem at all. And option (d) inverts the gate: Redemption Gates provide the MAXIMUM amount of redemption permissible by investors, in every redemption period.
3.How often must a Category III AIF disclose NAV to investors?
- a)Monthly for closed-ended funds and quarterly for open-ended funds
- b)Quarterly for closed-ended funds and monthly for open-ended funds
- c)Annually for both
- d)Daily for both
Show the answer
Answer: (b) Quarterly for closed-ended funds and monthly for open-ended funds
NAV calculated on each "Valuation Day" shall be disclosed to all investors on a quarterly basis for closed-ended AIFs and on a monthly basis for open-ended AIFs. The reason follows the product: an open-ended fund permits ongoing subscription and redemption at NAV, so investors need it more frequently. The same split governs computation: NAV should be calculated at least once in a calendar month, for open-ended Category III AIFs, or at least once in a quarter for closed-ended Category III AIFs, as on the last Business Day of such calendar month or quarter. One refinement worth carrying: in case a Category III AIF is investing in listed securities only, NAV is usually computed on a daily basis. And a structural requirement — every Category III AIF shall ensure that calculation of the Net Asset Value (NAV) is independent from its fund management function.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- Category I AIFThe AIF category for funds the government or a regulator treats as socially or economically desirable — venture capital, angel, SME, social impact, infrastructure, special situation and CDMDF funds.
- Category II AIFThe residual AIF category: anything that is neither Category I nor Category III and takes no fund-level leverage beyond a narrow temporary carve-out — private equity, private debt and fund-of-funds.
- DrawdownThe process by which the manager of a Category III AIF calls committed capital from investors as the fund needs it — also known as a capital call.
- Final CloseThe date that ends fund-raising for a Category III AIF scheme — after it, a close-ended scheme accepts no new investors, and only then may its units be listed.
- First CloseThe date an AIF scheme declares it has raised enough commitments to proceed — the point from which tenure, management fees and set-up cost amortisation all start running.
- Change of controlA change in who controls an AIF's sponsor or manager — majority board appointment or control of management for a company, or a 50% controlling interest otherwise — needing SEBI approval and an investor exit.
- Commitment PeriodThe window in a closed-ended fund during which the manager may call capital against commitments — and the period over which management fee is charged on committed rather than invested capital.
- Mandatory exit optionThe exit a close-ended AIF must offer dissenting investors after a material change: at least one month to dissent, buyout at no less than the average of two independent valuations, done within 3 months.
- Open-ended AIFAn AIF scheme that offers units continuously with no fixed maturity and lets investors redeem at set intervals — permitted only for Category III AIFs, with a variable corpus.
- Suspension of redemptionsAn open-ended Category III AIF halting redemptions in exceptional circumstances, justified only in investors' best interest or by SEBI — with no new subscriptions accepted while it lasts.
- National Investment and Infrastructure FundThe Government of India's own alternative investment fund, set up in 2015 as a Category II AIF to invest in infrastructure and strategic assets.
- Specified Alternative Investment FundThe fourth registration category SEBI inserted in 2023 for AIFs that fit none of Categories I, II and III, and for which SEBI may specify separate regulations.
- Fund-level leverageBorrowing or gearing taken by the AIF itself rather than inside a portfolio company — permitted for investment purposes only to Category III AIFs, and capped at 2 times NAV.
- Dissent periodThe window of not less than one month an AIF must give unit holders to record dissent to a material change, after which the manager must buy out the dissenters within three months.