Closed-end mutual funds sell a set number of shares to the public, which can be traded on the stock exchange. They issue all their shares at once through an initial public offering (IPO) to gather money for their initial investments.
Essentially, closed-end mutual funds collect capital by releasing a fixed number of shares in the market. In this article, we’ll discuss the characteristics, operation, benefits, and downsides of closed-end mutual funds.
Features of closed-end funds
Actively Managed: The closed-end mutual funds are actively managed. All the specific numbers of the units and shares and the investors who are investing in the shares are guided properly throughout the process of investing.
Changing share price: The closed-end mutual funds can trade at a premium or a discounted rate. It doesn’t always sell under the Net Assets Value. Also though the Net Asset Value (NAV) fluctuates closed-ended mutual funds don’t stick with the same price.
A specific number of units: There will be a specific number of units in the fund that will be available for buying. There will be limited stocks on the trade market in closed-end mutual funds.
Fixed investment time period: Similar to a specific number of units, closed-end funds give a specific time period for the investors to issue the share. If the issue deadline of the share crosses then no investors can buy certain shares or stocks.
Frequently use leverage: This feature of closed-end mutual funds tends to pay higher dividends to the investors in part because they use leverage to help boost returns. They borrow money to fund their asset purchases and to increase returns.
List of closed-end mutual funds in Nepal
|Maturity period ending date
|Sunrise First Mutual Fund (SMFL)
|NIC Asia Balance Fund (NABF)
|Siddhartha Investment Growth Scheme-2 (SIGS2)
|Nepal Merchant Bank and Finance (NMB 50)
|Citizen Mutual Fund-2 (CMF2)
|Nabil Balanced Fund-2 (NBF2)
|NIC Asia Growth Fund (NICGF)
|Global IME Sammunat Scheme -1 (GIMES1)
|Laxmi Equity Fund (LEMF)
|Laxmi Value Fund-1 (LVF1)
How do closed-end mutual funds work?
The closed-end mutual funds are launched like any other funds. An initial public offering is initiated and the fund houses list the funds or IPOs in the stock house or stock market.
Now the fund is available for buying and selling units. Then the share is issued to those who contribute capital to the mutual fund. However, the number of outstanding units will remain the same. The value of a closed-ended fund is dependent on NAV somehow but the actual price is determined by the demand and supply for the fund.
However, as the name implies, the closed-end mutual fund doesn’t issue additional shares or buy back shares.
Advantages of Close end funds
Presence of Skilled Managers: The mutual fund includes skilled portfolio managers who look after the issue of shares and the deadlines too. They analyze the whole stocks listed in the trade market and do an evaluation of the activities. The fund manager’s expertise plays a vital role in selecting funds.
Trade on the stock exchange: Like any other equity shares, the shares of closed-end funds are also listed in the stock exchange or trade exchange. From there the investors can choose to invest in the available shares as per their interest.
Flexibility: Unlike in open-end mutual funds, redemption is not allowed in closed-end mutual funds. The investors are given flexibility in order to sell their shares after the time period of the stocks are finished.
Liquidity: The shares that an investor holds can be sold at the trade exchange and it can be done in the form of cash. Therefore one can easily liquidate their investment.
Lower operating cost: Closed-end mutual funds have lower marketing costs and turnover rates. Hence less marketing costs results in lower operating cost as well.
Drawbacks of Closed-end mutual fund
Unlike the open-end mutual fund, the investor cannot review the historical performance of the shares. Over different market cycles, there can be different inflow and outflow of shares. Once the offering for issuing date is closed new investments cannot be made. The closed-ended mutual fund schemes don’t perform as well as the open-end mutual fund counterparts.
There are also many activities that need a portfolio manager or financial advisor to carry on the work which needs management and consultation fees.
What is the difference between an open-ended mutual fund and a closed-ended mutual fund?
The differences between open-ended mutual funds and closed-ended mutual funds are:
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So the above details of closed-end mutual funds give you information on why you can invest in this mutual fund and the drawbacks show the risks of investing in a closed-end mutual fund. Closed-end mutual funds are similar to mutual funds they professionally manage portfolios of stocks, bonds, or other investments.