Close-ended schemes

Close-ended schemes

Closed-end funds are ideal for adding and diversifying existing core bonds and stock holdings. Whether a scheme is closed-ended or open-ended, its success is influenced by the fund management, category, and investing approach. After the NAV increases by 5–10%, many investors in open-ended schemes generally act quickly to redeem their units and take their gains. This impacts investors who have money in the plan. As the lock-in period restricts early redemption and safeguards the interests of all investors, close-ended mutual funds are a superior choice in these circumstances.  

What are close-ended schemes? 

Close-ended schemes are an investment vehicle that allows investors to purchase a fixed number of shares during an initial offering period. Once this period ends, the number of shares in the scheme remains fixed, and investors can only buy or sell shares on the secondary market. These schemes are popular among investors who want to invest in a specific asset class or strategy but avoid being exposed to market fluctuations. Currently, there are about 480 close-ended funds available for trading on US stock exchanges. 

Understanding close-ended schemes 

A new fund offer (NFO) is created by an asset management company (AMC), and investors buy units of the scheme at a set price. There is no more room for new investors when the NFO period has ended. In addition, investors can withdraw their money once the plan is fully developed. When a plan reaches maturity, it is dissolved, and investors receive their money back at the NAV (net asset value) in effect on that day. 

Unlike exchange-traded funds (ETFs) or mutual funds, close-ended funds allow outside investors to purchase and sell shares. A close-ended fund’s management does not issue and buy back shares. 

Most close-ended funds are listed on the NYSE or Nasdaq, trading actively until the fund achieves its goal, liquidates itself, and distributes investor wealth. 

Features of close-ended schemes 

• One of the key features of close-ended schemes is that they offer investors a specified investment horizon. This means that investors know exactly when to expect to receive their principal and any returns.  
• Close-ended funds must abide by SEC regulations since they have registered with the SEC. Additionally, the close-ended funds’ investment portfolios are often managed by independent organisations known as investment advisors who are also SEC-registered. 
• Close-ended schemes can also give investors access to unique investment opportunities that aren’t available through other investment vehicles. For example, some close-ended schemes invest in private equity or real estate, which can be difficult for individual investors to access independently. 

Advantages of close-ended schemes 

• Close-ended funds have steady valuations of assets and a steady cash flow.  
• These funds trade on stock markets much like equity shares. As a result, investors can buy and trade the units instantly. Market prices may be lower or higher than the fund’s NAV. They can also use margin trading, market or limit orders, and other stock trading tactics. 
• Based on anticipated profits, investors may budget their upcoming expenses. 
• Close-ended funds allow the fund manager to build a unique portfolio with the potential to generate returns. Fund managers can investigate inexpensive debt and equity instruments that would not otherwise be included in the portfolio because of the lock-in period of close-ended schemes. 
• These schemes are not eligible for redemption. However, while being listed on the stock market, it allows the investor the option to sell their shares. Consequently, it is simple to liquidate an investment. 

Examples of close-ended schemes 

The Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG) is one of the biggest close-ended funds. It was established in 2007. 

Another example is the announcement made by the close-ended investment firms Cornerstone Strategic Value Fund and Cornerstone Total Return Fund. 

Frequently Asked Questions