What is Closed End Fund ? How Closed End Fund works in India ?
A Closed-End Fund is a type of mutual fund that issues a fixed number of shares through an initial public offering (IPO). After the IPO, the shares of a Closed-End Fund are traded on stock exchanges like regular stocks. Unlike Open-Ended Funds, Closed-End Funds have a fixed maturity period and do not issue or redeem shares on a continuous basis.
Here's how a Closed-End Fund works in India:
Initial Public Offering (IPO): A Closed-End Fund is launched through an IPO, during which a fixed number of shares are offered to the public. Investors can participate in the IPO and purchase shares at the offering price.
Listing and Trading: Once the IPO is completed, the shares of the Closed-End Fund are listed on stock exchanges for trading. Investors can buy or sell these shares on the secondary market through brokerage accounts, similar to trading regular stocks.
Fixed Number of Shares: Unlike Open-Ended Funds, Closed-End Funds have a fixed number of shares that are issued during the IPO. After the IPO, the number of shares remains constant and the fund does not create new shares or redeem existing shares.
Market Price and Premium/Discount: The shares of a Closed-End Fund are traded on stock exchanges based on supply and demand dynamics. The market price of the fund's shares may differ from its net asset value (NAV). If the market price is higher than the NAV, the shares are said to trade at a premium. If the market price is lower than the NAV, the shares are said to trade at a discount.
Portfolio Management: The fund manager of a Closed-End Fund actively manages the fund's portfolio. They make investment decisions based on the fund's investment objectives and strategies. The fund manager may buy or sell securities within the fund's portfolio to optimize returns and manage risk.
Dividends and Distributions: Closed-End Funds in India may distribute dividends or capital gains to shareholders. The timing and amount of these distributions are determined by the fund's investment income, realized gains, and distribution policies.
Fixed Maturity: Closed-End Funds have a fixed maturity period, which is typically mentioned in the fund's offer document. At the end of the maturity period, the fund is liquidated, and the proceeds are distributed to shareholders based on their shareholdings.
Closed-End Funds in India are regulated by the Securities and Exchange Board of India (SEBI). SEBI sets guidelines and regulations regarding the operations, disclosures, investor protection, and liquidity requirements for these funds.
Investors in Closed-End Funds in India have the opportunity to buy shares at the IPO and trade them on stock exchanges. The market price of the shares can be influenced by factors such as the fund's performance, market sentiment, and supply and demand dynamics. It's important for investors to consider factors such as the fund's investment objectives, historical performance, premium or discount to NAV, expense ratio, and the reputation and track record of the fund manager before investing in a Closed-End Fund.
