Close-ended funds are such schemes that stay open for direct investment by the investors only for a specified period and come with a defined maturity date. Examples of close-ended funds are Fixed Maturity Plans (FMPs). Similarly, some thematic funds are also launched with fixed maturity, to capitalise on the investment opportunities with a clear investment horizon. Thus, such schemes are useful when the investor’s financial goals are aligned with the maturity period of such schemes or if the investor needs to take advantage of the special tax rates for mutual fund investments. One can choose to invest in close-ended funds only in lump sum mode. While the transactions through mutual fund houses are restricted in close-ended funds, such funds are listed on stock exchanges to provide liquidity to the investors. One can choose to transact in such funds through stock exchanges, even while the liquidity may be low. The investor may need to liquidate such investments at a value lower than the prevailing NAV. Such difference due to liquidity issues is referred to as the impact cost and is commonly witnessed for close-ended funds due to low liquidity at stock exchanges.
The investors may consider investing in different funds, whether open-ended or close-ended, depending upon their suitability to the financial plans.