Closed ended funds issues a fixed number of units that are traded on the stock exchange. It functions much more like an exchange-traded fund than Mutual Funds. They are launched via NFO to raise money and then traded in the open market just like a stock. Though the value of the fund is based on the NAV the actual price of the fund is affected by demand and supply, as it is allowed to trade at prices above or below its actual or real value. Hence closed-end funds can trade at premiums or discounts to their NAVs. Units of closed-end funds are bought and sold through brokers. Closed Mutual Funds usually trade at discounts to their underlying asset value. These funds have a fixed maturity period.
a. Stable Asset Base
In Closed-ended funds, the investors are not allowed to redeem units of the fund except on the prescribed dates i.e. when the maturity of the fund expires. In this way portfolio managers get a stable base of assets which is not subject to frequent redemptions. The main advantage of a stable asset base is that the fund manager is in a comfortable position to formulate an investment strategy, keeping in mind the fund objectives holistically and without having to worry about the inflows and outflows.
b. Availability of Market Prices
Closed-ended funds trade on stock exchanges like equity shares. This provides an opportunity to the investors to buy/sell units of the fund based on real-time prices which can be above (premium) or below (discount) the fund‚Äôs NAV. They can make use of usual stock trading strategies like market/limit orders and margin trading.
c. Liquidity and Flexibility
Investors are free to avail liquidity offered by the funds. They may utilize real-time prices available during the trading day to buy/sell closed-end fund units at prevailing market prices. They get the flexibility to decide on their investments by using real-time information.
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