Impulsive withdrawals are a major challenge in the Indian mutual fund market. Studies show that during FY22-23 nearly 73% of mutual fund holdings in India were withdrawn within two years, causing many to miss out on the long-term benefits of compounding. To address this issue, a category of funds was designed to lock investments for a fixed tenure. So, what is close ended mutual fund? In this blog, we will be discussing all about it, its definition, features and more.
What Is a Close Ended Mutual Fund?
A close-ended mutual fund refers to a scheme that issues a limited set of units only at the time of its New Fund Offer (NFO). Once after the subscription window closes, fresh purchases directly from the fund are not allowed. These allotted units are later listed on stock exchanges, where trading happens at market-driven prices. In contrast to open-ended mutual funds, close-ended schemes run for a fixed duration, generally between three and seven years, offering a structured format for investment.
For example, let’s assume an asset management company launches a 5-year close-ended equity fund with 10 crore units at ₹10 each. Once the NFO closes, the no dditional units are issued. If an investor wishes to enter, they must buy from another investor on the stock exchange, and the price depends on market demand and supply, not just NAV.
How Close-Ended Funds Work
Close-ended mutual funds follow a structured issuance and trading process, which unfolds in specific steps:
- Close-ended mutual funds are launched through a New Fund Offer (NFO), during which a fixed number of units are issued.
- Subscriptions are permitted only during the NFO duration, usually ranging between 15 and 30 days.
- Once the NFO closes, no new units are created, fixing the total fund size for its entire maturity period, typically 3 to 7 years.
- Investors cannot redeem units directly with the fund house before maturity; redemption is allowed only at the end of the tenure based on the final Net Asset Value (NAV).
- Post the NFO closung, units are listed on stock exchanges for trading. Investors may buy or sell through brokers in the secondary market.
- Unit prices may move at a premium or discount to NAV, depending on supply-demand dynamics.
- Liquidity for units before maturity is provided only through stock market trading, which depends on trading volumes and market interest.
- Fund managers can operate without frequent redemption pressures, as inflows and outflows are fixed post-NFO.
Some examples of closes ended mutual funds schemes in India along with their respective maturity periods are as follows:
| Scheme Name | Maturity Period |
| SBI Tax Advantage Fund – Series III | 3 years |
| Sundaram Long Term Tax Advantage Fund – IV | 10 years |
| HDFC Fixed Maturity Plans (Series 44) | 3 years |
| ICICI Prudential R.I.G.H.T. Fund | 3 years |
Key Features: Fixed Shares, IPO, Market Trading
Close-ended funds carry specific attributes that make them distinct from open-ended schemes. The main features are as follows:
- Fixed number of units: During the New Fund Offer (NFO), the fund issues in a predetermined quantity. No new units are created post-NFO, keeping the fund size constant until maturity. This structure helps fund managers focus on long-term strategies without redemption-related challenges.
- Exchange listing and market trading: Units are listed on stock exchanges like NSE or BSE after the NFO. Investors have the option to buy or sell in the secondary market at existing prices, which could be above (premium) or below (discount) the NAV. Liquidity depends on trading volumes, giving investors flexibility to exit before maturity.
- Defined maturity period: Close-ended schemes come with a fixed life span, usually 3 to 7 years. At the end of this tenure, units are redeemed based on the closing NAV. Some funds may pay periodic dividends during the tenure, adding to returns.
- Portfolio stability and liquidity: Controlled inflows and outflows reduce redemption pressures, enabling stable portfolio management. Investors can trade on exchanges, offering liquidity even before maturity.
- Taxation: As of 2025, the LTCG applicable on equity-oriented funds is 12.5% above ₹1.25 lakh and the STCG is 20% under 1 year. On the other hand, tax on debt depends on purchase date and holding period.
Difference: Open-Ended vs Close-Ended Mutual Funds
When comparing open vs close-ended mutual funds, the differences lie in liquidity, structure, and taxation. Here’s how they differ:
| Aspect | Open-ended mutual funds | Close-ended mutual funds |
| Unit issuance | Units available for purchase continuously | Units issued only during NFO |
| Redemption | Investors can redeem anytime with the fund house | Redemption only at maturity; interim exit via stock exchange |
| Trading | Not listed on exchanges | Listed on exchanges; price may vary from NAV |
| Liquidity | High, as units can be bought/sold daily | Depends on exchange trading volumes |
| Fund size | Variable, changes with inflows/outflows | Fixed throughout maturity period |
| NAV pricing | Transactions always at NAV declared by AMC | Market price may be at premium or discount to NAV |
| Holding period suitability | Suitable for both short- and long-term goals | Designed for fixed-term commitments (3–7 years) |
| Fund manager approach | Frequent inflows/outflows may affect strategy | Stable portfolio, no redemption pressure |
Premiums & Discounts Relative to NAV
Closed-ended mutual funds often trade at prices that differ from their Net Asset Value (NAV); here’s how it works:
- Premium: A premium takes place when the trading price of units exceeds their NAV. This situation usually reflects strong demand, often fueled by a fund’s solid past performance, attractive dividend payouts, or investor confidence in the manager’s strategy. Showing that investors are paying more than the portfolio’s actual value.
- Discount: A discount occurs when the market price is below the NAV. This can happen if demand for the fund is weak, the overall market outlook is negative, or the investment approach does not appeal to investors. Discounts are also more common in funds with limited trading volumes.
The drivers behind these premiums and discounts include:
- Investor sentiment, which can lift prices during optimistic phases or drag them lower during cautious periods.
- Fund-specific characteristics like portfolio quality, yield consistency, and the reputation of the manager.
- Liquidity conditions, as thinner trading can exaggerate price gaps.
- External market factors, such as tax-driven selling or corporate actions, which may create short-lived deviations from NAV.
Use of Leverage in Close-Ended Funds
Many close-ended funds in India employ leverage to boost potential returns by deploying more than their net assets. This can involve borrowing capital, issuing debt instruments, or raising preferred shares, allowing funds to increase market exposure and potentially generate higher gains. However, leverage also magnifies risk, causing greater volatility in the net asset value (NAV) and share prices, as these units are traded on stock exchanges.
SEBI regulates leverage strictly, particularly for Category III Alternative Investment Funds (AIFs), capping it at two times the fund’s NAV. This limit includes all forms of exposure, such as debt, derivatives, and borrowed capital. Fund managers actively manage leverage according to market conditions, aiming to maximize income and capital appreciation while mitigating downside risk. Transparency is mandatory, with disclosure of leverage strategy, levels, and associated risks to investors.
For example, a close-ended fund with a NAV of ₹100 crore can borrow up to ₹200 crore, allowing it to hold total market positions worth ₹300 crore. Properly managed, leverage offers higher return potential within SEBI’s regulatory framework, ensuring investor protection while enabling close-ended funds to capitalize on market opportunities.
Conclusion
Close-ended mutual funds stand apart because of their fixed maturity and exchange-traded structure. Their pricing often moves away from NAV, creating situations of premiums or discounts based on market sentiment and liquidity. The absence of constant inflows and outflows gives fund managers greater stability, while investors still have an exit option through stock exchanges. For readers seeking clarity on what is close ended mutual fund, knowing how it works and differs from open-ended schemes is the starting point.
FAQs
Open-ended funds allow investors to buy or sell units at any time at NAV, offering high liquidity and flexibility. Close-ended funds are available only during the New Fund Offer (NFO) period, have a fixed maturity, and trade on exchanges, often at prices different from NAV.
Close-ended funds are listed on stock exchanges, and their market price is driven by supply and demand. This can lead to the units trading at a premium (above) or discount (below) to their Net Asset Value, reflecting investor sentiment, liquidity, and market conditions.
Leverage in closed-ended funds means borrowing money or using financial derivatives to amplify potential returns. This can boost gains in rising markets but also increases the risk of larger losses if asset prices fall.
Advantages include a stable asset base that allows fund managers to pursue long-term strategies, and sometimes higher yield potential due to leverage. Risks include lower liquidity, potential premium/discount volatility, and the chance that leverage may magnify losses.
You can invest during the fund’s NFO period, purchasing units at the offer price. After the NFO closes, units are listed on stock exchanges and can be bought or sold through a broker at prevailing market prices until maturity.
