- What is a closed ended mutual fund?
- Who all can invest in a closed ended mutual fund?
- What are the advantages of a closed ended mutual fund?
- What are the disadvantages of a closed ended mutual fund?
- How taxation works in the case of a closed ended mutual fund?
The Closed-ended mutual funds allocate a predetermined number of fund units which are traded on bourses. The Close-ended funds work like an exchange-traded fund rather than a mutual fund. Similar to stocks they are issued through new fund offer to raise money and then traded in the open market. The closed-end funds may trade at discounts or premiums to their Net Asset Values. These funds said to have a set maturity period.
Closed ended funds calls for lumpsum investment and do not offer a withdrawal option until maturity. Thus, investors with an investible amount and an investment horizon in line with the maturity date of the fund scheme could opt for closed ended mutual funds.
One of the advantages of the closed ended fund is stable base of assets which meansinvestors couldwithdraw their units on fixed dates only that is the time when the fund matures. Another advantage is the closed-ended funds mainly trade on stock exchanges whichgives achance for investors to sell or buy fund units on the basis of real-time prices, which can be below (discount) or above (premium) the Net Asset Value of the fund.
One of the disadvantages of the closed ended fund is closed-ended funds calls foran investor to invest a lump sum amount at the moment of their launch. This could be a risky approach to deal with an individual’s investments as it exposes investor to bet bigger than otherwise warranted. Another disadvantage is the unavailability of past data in the case of the closed-ended funds. Thus, investing in a closed-ended fund invites uncertainty and unpredictability for which investors can only relyupon the fund manager.
The tax rates depend on the percentage of investments made by the scheme in equity and debt in the case of Closed Ended Mutual Funds. It is treated as an equity fund for tax purposes if the fund invests 65% of its total assets or more in equity and equity-related instruments. Whereas it is treated as a debt fund for tax purposes if the fund invests at least 65% of its total assets in debt instruments.
