In close-ended funds, the number of units issued is fixed. After the initial issue/ IPO, the units are traded on the exchange like any other stock. Investors can buy into these funds in the IPO after which such schemes do not issue new units except in case of bonus issue.
Unlike open ended funds the buy/sell transactions happen between the investors after the initial issue. Close-ended schemes have fixed maturity periods. The market price of the units varies due to demand and supply factors, investors’ expectations and other market factors as well as the changing values of the securities in the fund’s holdings.
Share/unit price may not be equal to the NAV since the price also depends on the demand and supply. Sometimes market price of a unit goes below NAV simply because of lack of liquidity.
Liquidity in closed ended funds is poor. Hence risk is also more. They are not popular compared to open ended funds. The sponsor of the mutual fund company will raise funds through a process commonly known as underwriting to create a fund with specific investment objectives. The fund retains an investment manager to manage the fund assets in the manner specified.
Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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