Closed-End Fund

A closed-end fund is a type of professionally managed fund having a defined portfolio (the combination of more than one script) based on a fixed number of shares issued at an initial public offering, listed on the exchange for trading in the secondary market, and are not redeemable from the funds.

Since they have a fixed number of shares and their prices fluctuate compared to the net asset value (NAV), they may trade at a discount or at a premium from the NAV. Investors should carefully study the strategies followed in the fund for investments, the management fee, historical performance and returns before deciding to invest in them.

• A closed-end fund is an investment vehicle under expert supervision. It boasts a predetermined portfolio of multiple stocks issued as a fixed quantity of shares during an initial public offering (IPO). 
• Closed-end funds are curated and overseen by seasoned professionals. The fund is composed of specific securities, ensuring a deliberate selection aligned with investment objectives. 
• While these securities are tradable on secondary markets, the avenue of redemption is deliberately restricted.
• Investment funds, including closed-end ones, deliver commendable merits encompassing stability, diversification, and flexibility. 

Closed-ended funds are professionally managed funds, the same as a mutual fund. They have a dedicated relationship manager who takes care of the portfolio and continually trades, i.e., buying/selling and holding scripts per market conditions.

Like exchange-traded funds, these are traded as equity as their prices change throughout the trading session. However, these are very similar to equity traded funds but have a huge difference also.

After the initial public offering, the company cannot issue further shares under closed-ended funds. Also, these funds cannot be redeemed through the buyback of shares The only thing possible is for investors to buy and sell these shares in the secondary market.

These are similar to exchange-traded funds or mutual funds. These funds are maintained by investment advisors, run by expert management who initiates trading on a set portfolio. They have several features that make them popular among their class. They charge some fees, which yield revenue to investors through capital gain. This is categorized as an investment company accessible by the general public for investing.

The portfolio and portfolio manager must be registered with the securities and exchange commission and comply with exchange guidelines/requirements. Per the rules of the security exchange commission, it can be launched only by way of an initial public offering open for a short period (2-10 days) as allowed by exchange rules, as permitted. Afterward, these funds are treated as shares and are traded in the stock market as equity scripts. The fund's price can be more or less than the initial public offering price depending on the demand and supply in the market.

Here are some closed-end fund example that are commonly used to describe these type of funds existing in the financial market.

1. HDFC Equity Opportunities Fund - It’s a large-cap closed-end fund maturing in July 2020 corpus of 1118 crore traded at 9.85 against 10.65 NAV with an 8.1% discount.
2. ICICI Prudential Value Fund - It is a valuable fund with assets of 1779 crore, attaining maturity in June 2021, trading at 9.2 against 10.38 NAV with a 12.8% discount.
3. Units of ICICI Prudential Bharat Consumption Fund - It is a series II fund with assets of 267 crores traded at 8.79 against 9.91 NAV with a 12.9% discount.

This closed-end fund example given above can be described as a professionally managed fund containing a fixed proportion of scripts within itself (a defined portfolio) offered during the initial public offering. It cannot be redeemed from the funds but can only be traded in secondary markets.

These funds offer broad benefits like providing stability, flexibility, fixed non-redeemable funds, a unique portfolio, and exchange trading options but also have shortcomings like locking of funds that cannot be redeemed from funds (one can get out by trading on the secondary market), cost of subscribing is more as specific fees need to be paid to portfolio managers, the unpredictability of markets, limitations in subscribing options.

Let us look at the various steps to invest in a closed-ended fund.

• Investment in closed-end funds can be made directly in markets or through agents. Before investing, an investor must ensure that he is investing through a distributor registered with the association of mutual funds, which deals in such funds having ARN allotted by the association. It can also be done by contacting mutual fund distributors and asking them for necessary formalities and forms and applications which need to be completed.
• If investment needs to be made through a direct plan, then a financial advisor is required, which is available through distributors. Still, there is no need to pay any commission to the distributor for the advisory services. Distributors must disclose all the tariff commissions and charges for all available schemes.
• Investors can invest directly by visiting closed-end funds, mutual funds branches, or online websites and select the  closed-end fund list. Physical forms can be submitted to agents and distributors who provide such services.

Before investing, the investor must check the track record of funds and schemes and refer to product labeling.

Labeling a closed-ended fund list must contain –

• Nature of scheme
• Investment objective
• Level of risk
• Scheme information documents

Just as every financial concept has its own advantages an disadvantages, so does this concept. Let us try to identify the advantages first.

1. Stability - These are stable with their asset base. At the time of NFO, these funds gathered a vast asset base. The fund manager is at minimal risk of asset redemption and the change in the asset. These funds can be invested in other financial assets, equity, or debt securities.
2. New Opportunities - It allows investors to invest in a wide range of new and creative strategies.
3. Freedom from Large Flows - There is no risk of massive inflows and outflows in closed-end funds. Investor money is locked until the time of maturity. As a result, the fund manager is capable of making rational decisions.
4. Enhanced Flexibility - The investor is free to sell the fund and liquidate his position per rules made by the fund house. These units can be sold in the market during trade hours.
5. The fund managers can create a unique Portfolio - An impressive portfolio to earn better returns.
6. Trading on Stock Exchanges - Investors can trade units of their closed-end fund on a stock exchange. Prices may vary from the net asset value of funds.

The disadvantages of the concept are as follows.

1. Cost - Subscriber has to pay massive fees on buying or selling unit,
2. Subscribing Option - Can be purchased only through brokers or intermediaries.
3. Prompt Changes - Portfolios under such funds are usually unpredictable and subjected to rapid changes.
4. Liquidity - These funds offer less liquidity as compared to open-end funds.
5. Pricing - Discounting factor may lower the price of the closed-ended funds.

However, it is necessary to know the advantages and disadvantages of the investment option so that the investors can decide whether investing in such an opportunity is worthwhile and whether it aligns with one’s objectives, risk level, return expectation, and market conditions.

The above are two different types of investment funds available in the financial market. Let us identify the differences between them.

• The former contain a particular or fixed number of share for purchase, but for the latter, the number of shares can change through new issue or redemption.
• For the former, the company’s share capital remains fixed whereas for the latter, the share capital can change later.
• The liquidity of the former is less than the latter. The open ended fund allow investor to buy and sell the shares directly from the company providing more liquidity than the closed ended one which can only be bought or sold in the enchange.
• Closed ended fund can be either actively or passively managed compared to open ended ones which are primarily actively managed.
• For the former, the fund’s portfolio is regularly disclosed so that the investors are able to know more about their investment strategies. But for the latter, the portfolios are revealed periodically, usually every quarter.
• The expense ratio of the former is typically lesser than the latter because the latter has to bear the cost of issue and redemption frequently.

However, both the above funds offer their investors the facility of money management using professional help and guidance. It also offers the opportunity for diversification or portfolio for better returns and risk reduction. But the choice of the fund will depend on the investment strategy, liquidity preference and pricing structure.

This has been a guide to what is a Closed-End Fund. We explain its differences with open-ended funds, along with examples, how to buy and advantages. You can learn more about it from the following articles –

• Shares vs Mutual Funds
• Mutual Fund Types
• Open-Ended vs Closed-Ended Mutual Funds
• Mutual Fund Analyst