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A closed ended fund can be best explained when compared to an open-ended scheme. Let's understand the difference between the two. Closed-ended vs open-ended The most important difference is that closed-ended funds work like stocks where the price is driven by supply and demand. Typically , one can consider a mutual fund as "open-ended" because the cash flow door -both into and out of the fund -is always open. In other words, the portfolio manager continues to invest new cash from investors, and the fund company continues to offer new shares of the fund to new investors.
Since closed-ended funds come with a pre-defined maturity date, the cash flow door -into and out of the fund -is always (with a few exceptions) closed. The manager only invests a fixed amount of cash that was raised in an initial public offering of the fund's shares. The number of fund shares do not fluctuate based on investor demand. In India, most closed-ended mutual funds schemes are launched with a specific maturity date, which gives a clear time frame to investor as well as the fund manager. After the initial public offering, the fund manager takes charge of the fund and invests according to the fund's mandate. The closed-ended fund is then configured into a stock that is listed on an exchange and traded on the secondary market.
No redemption pressure The primary reason is that managers of closed-ended schemes are not forced to sell a particular security when an investor wants to sell his/her share in the fund. Let's say we have a manager who is running two funds that differ only in structure -one is a closed ended and the other an open-ended. Both funds hold stocks of companies A and B -the fund manager would like to hold both the stocks. In the closed-ended fund, the manager is able to continue to hold both stocks; but in case of the open-ended scheme, the manager must sell shares of both the companies to meet redemption needs and raise cash for investors. Lower expense ratio Investors put their money in closed-ended funds for good returns on their investments through the traditional means of capital gains and long-term income potential. The wide variety of closed ended funds on offer and the fact that they are all actively managed (unlike open-ended funds) make such schemes an investment worth considering. From the cost perspective, the expense ratio for closed-ended funds may be lower than the expense ratio for comparable open-ended schemes.
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