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Open up to closed ended funds
Published On , 23 Nov 2017 By ET Wealth
People usually refer to open ended funds when they speak about mutual funds. However, there’s another category of funds, which are a lot different from open ended funds, called closed ended funds. A close ended fund issues units to investors only during the launch of the offer. After that these units are listed on the stock exchanges and could be traded just like listed stocks and bonds.
In closed ended funds, mutual funds sell a definite number of units during the NFO
Post-NFO, unlike open ended funds, no new money enters the fund’s portfolio
If investors want to purchase units of the closed ended fund, they can buy it from the stock exchange
Likewise, if they want to redeem their units, they can sell their units in the stock market
Units of most closed ended funds trade at a discount to the NAV of the fund
At the end of the term, the fund is either terminated by returning the money to investors or is made an open ended one.
Unlike open ended funds which run for perpetuity, closed ended funds are run for a definite period of time.
ADVANTAGES OF CLOSED ENDED FUNDS
Investors can obtain units of closed ended funds at a discount from the market and wait for it to appreciate over time, that is till the closure of the fund.
Since no new money comes into the fund, the fund manager has the liberty to take a long term view of his/her portfolio and stay invested without the pressure of pre- mature liquidation.
At times closed ended funds generate higher level of income compared to their open ended peers as the former may have the flexibility to build a concentrated portfolio
Investors need to do some research before investing in closed ended funds
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