Close-ended schemes in mutual funds are structured differently compared to open-ended schemes.
1. Characteristics:
Close-ended mutual fund schemes have a fixed maturity period, typically ranging from 3 to 15 years, specified at the time of launch.
During the initial offering (NFO - New Fund Offering), investors can subscribe to the units. After the NFO period, the fund is closed for further subscriptions.
Units of close-ended funds are listed and traded on stock exchanges after the NFO period, providing liquidity to investors who wish to exit before maturity.
2. Features:
Fixed Maturity: These funds have a predetermined maturity date, after which the fund is liquidated, and investors receive their share of the proceeds.
Limited Liquidity: While units are listed on stock exchanges post-NFO, liquidity may be limited compared to open-ended funds, as trading volumes can vary.
NAV Calculation: NAV is typically calculated weekly or monthly, unlike daily in open-ended funds, due to the fixed nature of the portfolio during the maturity period.
3. Types of Close-ended Funds:
Equity-oriented: Invest in stocks with the objective of capital appreciation. Example: UTI Equity Fund Series.
Debt-oriented: Invest in fixed-income securities for regular income. Example: Kotak FMP Series.
Interval Funds: A hybrid type that combines features of open and close-ended funds, allowing limited transactions at specified intervals.
4. Advantages for Investors:
Structured Investment: Fixed tenure provides clarity on the investment horizon.
Portfolio Stability: Fund manager's strategy remains consistent throughout the tenure.
Potential for Discounts/Premiums: Units can trade at discounts or premiums to NAV, depending on market demand and performance expectations.
5. Example of a Close-ended Scheme:
SBI Equity Hybrid Fund: This close-ended scheme by SBI Mutual Fund combines equity and debt instruments to provide capital appreciation and regular income. It has a fixed maturity period during which investors can buy units and trade them on stock exchanges.
6. Considerations for Investors:
Lock-in Period: Investors cannot redeem units directly with the mutual fund until maturity, except through secondary market trading.
Market Risk: Prices of close-ended fund units in the secondary market can fluctuate based on investor sentiment and market conditions.
Expense Ratio: Management fees and other expenses affect overall returns.
In summary, close-ended mutual fund schemes in India offer investors a structured investment option with a fixed tenure and potential liquidity through secondary market trading. They cater to investors looking for defined investment periods and may be suitable for specific financial goals or risk appetites.