Every mutual fund scheme is launched through a New Fund Offer (NFO) which can range for a maximum of 30 days, as per the guidelines issued by market regulator SEBI (Securities and Exchange Board of India).
There are two types of mutual fund schemes on the basis of subscription period – open-ended schemes and close-ended schemes. While the units of an open-ended scheme can be purchased and redeemed even after the closure of the NFO period, the same is not true for close-ended funds. An investor can purchase the units of a close-ended scheme from a fund house only during the NFO period and can redeem them with the fund house only after maturity which typically ranges from 3 to 7 years.
But what if, an investor needs to redeem a close-ended fund before its maturity? By the very nature of close-ended funds, it is not possible to purchase or redeem their units from the fund house outside the NFO period. However, there is a way out.
In order to provide an exit route to the investor of a close-ended fund, SEBI has mandated fund houses to either list the units of its close-ended schemes on a stock exchange or allow an investor to sell the scheme units to the fund house through periodic repurchase at NAV (Net Asset Value) related prices.
Using the former option, an investor can step out of a close-ended scheme by selling his/her scheme units through stock exchanges.
Mutual fund platforms of two major stock exchanges where close-ended scheme are listed include:
- National Stock Exchange’s (NSE) mutual fund platform – NMF II (https://www.nsenmf.com/)
- Bombay Stock Exchange’s (BSE) mutual fund platform – BSE StAR MF (https://bsestarmf.in/index.aspx)
Why Should I Invest in Close-ended Funds?
Unique Portfolio: The fund manager of a close-ended fund carries no redemption burden or pressure. Thus, he/she has an opportunity to explore undervalued equity and debt instruments even if they come with a low liquidity profile. Such unique portfolios can potentially given exemplary returns.
Concentrated Holdings: A close-ended scheme can invest in relatively few stocks, around 25-30. This allows a close-ended mutual fund scheme to take and benefit from concentrated positions.
Stability: Unlike an open-ended scheme, a close ended scheme is not exposed to sudden and large movements of funds. Due to the absence of sudden inflows and outflows of cash, a fund manager is neither forced to sell a scheme’s holding at low prices, nor forced to buy securities at sky-high valuations. The lock-in feature of a close-ended fund allows fund managers to focus on selection and performance monitoring of securities.
Long-term benefit: Due to the lock-in period of close-ended schemes, the investors save themselves from getting tempted to participate in potentially risky short-term market movements. By remaining invested in a close-ended scheme till its maturity which ranges to 3-7 years, an investor can potentially take home the maximum possible returns.
Here is a List of Top Performing Mutual Funds You can Invest in FY 2019-20
(Data as on Dec 6, 2019; Source: Value Research)
Also Read : How to Redeem Mutual Funds Online