20 Nov, 2025
5 mins read
Closed-ended mutual funds are a distinct category in the Indian mutual fund landscape. They operate differently from traditional open-ended schemes and offer features that appeal to investors who prefer discipline, fixed investment periods and predictable structures. Understanding how they work helps investors decide whether they fit into their financial plans. This blog explains the meaning, working mechanism, features, advantages, disadvantages and taxation of closed-ended mutual funds, along with clear FAQs.
A closed-ended mutual fund is a type of scheme where investors can subscribe only during the New Fund Offer period. Once the offer closes, the fund stops accepting new investments. The units remain locked in for a fixed tenure, usually between three and seven years.
Unlike open-ended funds, where investors can redeem units anytime, closed-ended schemes do not allow early exit directly with the fund. Instead, units are listed on the stock exchange, allowing investors to trade them with other participants.
Closed-ended funds follow a structured investment and redemption process.
Investors can buy units only when the fund launches its New Fund Offer (NFO). After this period, no fresh purchases are allowed.
Once the fund closes for subscription, units remain locked in until maturity. Investors cannot redeem directly through the fund during this period.
To provide liquidity, the fund lists its units on the stock exchange. Investors can buy or sell units at market prices, which may differ from the fund's Net Asset Value (NAV).
At maturity, the fund redeems all units at the prevailing Net Asset Value and returns the proceeds to investors.
Closed-ended funds have several unique characteristics that set them apart from open-ended schemes.
The investment period is predetermined. Investors know exactly when the fund will mature.
Since investors cannot enter or exit frequently, the fund manager can follow a long-term strategy without worrying about sudden redemptions.
Units are listed on stock exchanges. Prices depend on supply and demand, and may trade at a premium or discount to NAV.
The fixed corpus allows the fund manager to invest without liquidity pressure, often enabling more focused strategies.
The fixed maturity structure makes these funds suitable for medium-term goals such as education expenses or planned purchases.
Closed-ended schemes offer several benefits to disciplined investors.
Since redemptions are restricted, the fund manager can maintain a stable allocation and hold positions until they play out.
Investors cannot redeem units during market volatility, which helps avoid impulsive decisions influenced by short-term movements.
With a stable pool of funds and no sudden withdrawals, the fund manager can take long-term positions that may benefit the portfolio.
When units trade at a discount to NAV on the exchange, new buyers may enter at attractive valuations.
Closed-end funds are useful when investors prefer investments with defined maturity periods.
While they offer advantages, closed-ended funds may not suit every investor.
Although listed on exchanges, actual trading volumes may be low. This makes it difficult to buy or sell units easily.
Market price may not reflect the fund’s true value. Units often trade at a discount, affecting investor returns.
Investors cannot use SIP or STP facilities because units must be purchased during the NFO.
Once invested, investors must stay until maturity unless they trade through exchanges.
Closed-ended funds do not always outperform open-ended schemes. Results depend on market conditions and fund management.
The tax treatment depends on whether the fund is equity-oriented or debt-oriented.
Short-Term Capital Gains (holding up to one year): Taxed at 15 percent.
Long-Term Capital Gains (holding more than one year): Gains above ₹1 lakh taxed at 10 percent.
Debt funds follow slab-based taxation.
Gains added to income and taxed as per the investor’s income slab.
Indexation benefits are not available under current rules.
Dividend income remains taxable as per the investor’s slab, as dividends are added to total income.
Closed-ended mutual funds offer a structured investment option for those who appreciate discipline, fixed tenures and stability in fund management. Their unique design allows fund managers to follow long-term strategies without worrying about fluctuating inflows and outflows. However, limited liquidity and trading at discounts to NAV can affect investor experience. Understanding how these funds work, along with their advantages and risks, helps investors decide whether they align with their goals.
A closed-ended mutual fund is a fund you can invest in only during its launch. After that, units remain locked in for a fixed period. You cannot redeem them before maturity directly with the fund, but you may trade them on the stock exchange.
You cannot redeem units before maturity through the fund house. However, you may sell the units on the stock exchange if buyers are available. Prices may differ from the fund’s actual Net Asset Value.
Neither is universally better. Closed-ended funds offer stability, while open-ended funds provide liquidity and flexibility. The choice depends on the investor’s preference, risk profile and financial goals.
Closed-ended mutual funds do not guarantee returns. Like all market-linked investments, their performance depends on market conditions and fund management.
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