A close-ended fund is a form of pooled investment product, which raises the money through an IPO, when its units are issued, after which the units get listed on an exchange for buying and selling on the secondary market. Close-ended funds cannot be redeemed until maturity.
Investors don’t interact with the fund house of a close-ended fund after the subscription window is shut. Whereas, in open-ended funds, investors transact with the AMC and not with the exchange.
Close-ended funds’ advantages include letting the fund house deploy the fund optimally without having to worry about redemption requests from investors who transact on the exchange instead. It is easier for investors to trade-in as well as they do it on the exchange.
How are close-ended funds beneficial?
Close-ended funds trade on an exchange just like a stock. Their price fluctuates throughout the day, whereas the price of Open-ended Fund changes at the end of the day, therefore providing a higher yield than open-ended funds. The price of open-ended funds is based on the Net Asset Value (NAV). The pricing is transparent and is managed by professionals. One can buy and sell these funds just like a stock, i.e., anytime.