Mutual funds provide an easier and safer investment mode in the stock market to millions of investors. It is a better mode of investment on account of reduced costs as compared to investing in individual stocks as well as higher returns than the market. Mutual funds are classified based on various categories. Mutual funds classified based on structure are classified into three categories namely, open ended funds, closed ended funds and interval funds.
Read on to know more details regarding close ended funds.
Close ended funds can be in the nature of equity funds or debt funds. They are essentially funds with a limited number of units. Investors can subscribe to the fund during the New Fund Offer (NFO). Once the NFO closes, the investors cannot invest in the scheme. These funds are actively managed funds and have a fixed maturity period but can be traded in the open market.
As mentioned above, close ended funds are launched at the time of NFO but cannot be redeemed or subscribed after such period. The funds can be exited after their maturity which is usually 3-4 years. The actual price of the fund is determined by the Net Assets Value (NAV) of the Fund. However, these funds can be traded at a price that is above or below such price based on the forces of demand and supply. This also means that the price of the units will be dependent on the market volatility as well as the fund performance.
Close ended funds provide more room to the fund managers to manage the funds raised and meet long term financial goals without the pressure of providing short term returns. The funds raised at the time of NFO are locked-in till maturity which allows the fund manager to invest in assets that may provide better returns but may not be as liquid.
Close ended funds have some inherent advantages. Given below are some examples of such advantages.
Close ended funds are not free from certain limitations. These limitations are discussed below.
The basic difference between open ended and close ended funds is the restrictions on the entry and exit from the fund. Investors can exit the open ended funds at any point of time. Whereas, in case of close ended funds, the investors do not have this freedom to the similar extent.
The other important difference between the two is the absence of SIPs in close ended funds. This factor plays a significant role in the investment decision of an investor and can often weigh in towards open ended funds.
Close ended mutual funds are taxed in the same manner as any other mutual fund. The applicable tax treatment depends on their classification as an equity oriented fund, debt oriented fund or a hybrid fund. Investors are liable to pay tax on the capital gains arising from the sale or redemption of the units of the fund. The applicable tax rate in case if each typoe of close ended fund is tabled below.
Type of funds | Meaning | Short term gains | Tax rate | Long term gains | Tax rate |
Equity mutual funds | Minimum 65% investment in equity and equity related instruments | Less than 12 months | 15% (plus cess and surcharge) | 12 months and more | Exempt up to Rs.1,00,000. Above Rs.1,00,000 taxed at 10% (plus cess and surcharge) |
Debt mutual funds | Minimum 65% investment in debt and debt related instruments | Less than 36 months | Slab rate of investor | 36 months and more | 20% (plus cess and surcharge) |
Hybrid equity oriented mutual funds | Minimum 65% investment in equity and equity related instruments | Less than 12 months | 15% (plus cess and surcharge) | 12 months and more | Exempt up to Rs.1,00,000Above Rs.1,00,000 taxed at 10% (plus cess and surcharge) |
Hybrid debt oriented mutual funds | Minimum 65% investment in debt and debt related instruments | Less than 36 months | Slab rate of investor | 36 months and more | 20% (plus cess and surcharge) |
Close ended funds are best suited for investors with long term investment goals that do not have the need or inclination to redeem the units in the short term based on market volatility. These funds often provide sufficient capital gains to the investors over the tenure of the fund but require the patience of the investors and the expertise of the fund managers to deliver.
1. Are close ended funds passively held funds?
No. Close ended funds are actively managed funds and are fund manager oriented or depend solely on the fund managers for their performance.
2. Is the expense ratio of close ended funds high?
The expense ratio of close ended funds is relatively lower as compared to the expense ratio of open ended funds.
3. What is the treatment of dividends in case of close ended funds?
Dividends to the investors are paid in the form of monthly or quarterly payouts based on the holdings of the fund.
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