Definition: The unit capital of closed-ended funds is fixed and they sell a specific number of units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its NFO period is over.
Description: This means that new investors cannot enter, nor can the existing investors exit till the term of the scheme ends. However, to provide a platform for investors to exit before the term, the fund houses list their closed-ended schemes on a stock exchange.
Trading on a stock exchange enables investors to buy and sell units through a broker in the same manner as transacting the shares of a company. The units may trade at a premium or discount to the NAV depending on the investors’ expectations of the fund’s future performance and prospects. The demand and supply of fund units and other market factors also affect their price.
The number of outstanding units of a closed-ended fund does not change as a result of trading on the stock exchange. Apart from listing on an exchange, these funds sometimes offer to buy back the units, thus offering another avenue for liquidity. Sebi regulations ensure that closed-ended funds provide at least one of the two avenues to investors for entering or exiting.
The closed-ended funds are free from the worry of regular and sudden redemption and their fund managers are not worried about the fund size.
Source: Economic Times