Close Ended Mutual Funds: Meaning, Features & Examples

For most new investors, mutual funds feel like a simple concept-put in money, let professionals manage it, and watch it grow over time. But within the world of mutual funds, there are several structures that influence how flexible your investment is, how liquid it remains, and how you access your returns. One such structure is the close ended mutual fund, a category often misunderstood but extremely important to grasp before investing.

Close-ended mutual funds have a set time schedule and restricted periods of entry as opposed to regular funds which remain open to buy and sell all-year-round. Their actions, benefits and dangers are not similar to open ended funds and this is the reason why a good grasp can make you make better decisions.

Close-ended mutual fund have a fixed maturity and can be purchased only during an NFO. This guide explains what is close ended mutual fund, their meaning, features, examples, benefits, risks, close ended mutual fund example, close ended mutual fund meaning and difference between open ended and close ended mutual fund.

What is Close Ended Mutual Fund?

A close ended mutual fund is a type of mutual fund that has a fixed maturity period-usually between 3 to 7 years-and is available for purchase only during the initial offer period (NFO). Once the subscription window closes, the fund stops accepting new investments.

Here’s the simplest definition:

A close ended mutual fund is a scheme where units can only be bought during the launch window and cannot be redeemed until maturity.

After the NFO closes, the number of units remains fixed. Investors must stay invested for the entire tenure unless the fund is listed on a stock exchange and units are traded there (where liquidity is usually low).

What is Close Ended Mutual Fund? How does it work?

The functioning of a close ended fund revolves around its restricted structure and time-bound nature.

1. Subscription Only During NFO

You can invest only when the fund first launches.

2. Fixed Maturity

The fund has a pre-defined maturity-3, 5, or 7 years being common.

3. No Early Redemption

Investors typically cannot withdraw until the fund matures.

4. Listed on Stock Exchange

Units are listed on NSE/BSE, but trading volume is often thin.

5. Portfolio Stability

Since investors cannot withdraw early, fund managers don’t face sudden redemption pressure, allowing them to follow long-term investment strategies more efficiently.

Close ended funds are therefore more structured, rigid, and predictable in terms of fund flow.

Close Ended Mutual Fund Meaning

The close ended mutual fund meaning becomes clearer when comparing it to the mutual fund structure we are most familiar with-open ended funds.

Open ended funds allow continuous inflows and outflows. Close ended funds, on the other hand, lock investors’ money until maturity and do not accept fresh purchases after the NFO.

This structure supports disciplined investing and removes emotional decision-making from the investor’s side-particularly attractive for long-term themes or tax-saving categories.

Close Ended Mutual Fund Example

To understand it clearly, here’s a realistic scenario: Suppose a fund house launches the ABC Infrastructure Growth Fund, a close ended mutual fund with a 5-year maturity.

Subscription period: Jan 1 to Jan 30 (NFO)
NFO closes on Jan 30
No new units can be purchased afterward
Investor money remains locked until the 5-year period ends
Units may be listed on NSE/BSE, but liquidity is limited

Once the scheme matures after 5 years, the fund closes, the portfolio is liquidated, and investors receive their returns.

This is the classic close ended mutual fund example used to illustrate how rigid yet structured these schemes are.

Types of Close Ended Mutual Funds

Close ended mutual fund comes in a few common formats:

1. Fixed Maturity Plans (FMPs)

Popular in debt category-invest in fixed-income instruments that mature in sync with fund duration.

2. ELSS (Tax Saving) with Lock-In

While ELSS is technically open ended, it behaves like a close ended fund during its 3-year lock-in period.

3. Thematic or Sectoral Close Ended Funds

Funds that target sectors like infrastructure, energy, or manufacturing.

4. Interval Funds

A hybrid-opens at specific intervals for purchase/redemption but remains closed otherwise.

Features of Close Ended Mutual Funds

Close ended mutual fund have distinctive traits:

Limited Accessibility: Available only during NFO.
Stable Corpus: No unexpected redemptions after launch.
Better Portfolio Management: Fund managers can take long-term positions without fear of liquidity demands.
Market Determined Pricing: If listed on stock exchanges, units trade based on demand and supply-not just NAV.
Lock-In Ensures Discipline: Investors remain committed for the entire maturity.

Advantages of Close Ended Mutual Fund

Although not as popular as open ended funds, close ended funds offer certain unique benefits:

Zero Redemption Pressure: Fund managers can invest confidently in long-term opportunities.
Ideal for Fixed Income Strategies: FMPs perfectly match maturities of underlying securities.
Emotional Discipline: Investors cannot exit on panic or market volatility.
Potentially Higher Returns in Certain Cycles: Because of stable corpus and long-term themes.

Disadvantages of Close Ended Mutual Fund

Illiquidity: Money is locked until maturity.
Limited Entry Window: If you miss the NFO, you must buy units on exchange (with low volume).
Market Price May Deviate from NAV: Units may trade at discount or premium, creating pricing mismatch.
No SIP Option: You cannot build a monthly investing habit through SIPs.
Higher Risk if Theme Underperforms: You are committed for the entire tenure regardless of market cycles.

Difference Between Open Ended and Close Ended Mutual Fund

Factor	Open-Ended Mutual Fund	Close-Ended Mutual Fund
Liquidity	Fully liquid; investors can buy or sell units anytime.	Locked-in until maturity; redemption allowed only after the term ends.
NAV-Based Pricing	Units are bought and sold at the prevailing NAV.	Units trade on the stock exchange; price may differ from NAV.
Subscription Window	Open for investment all year round.	Available for subscription only during the New Fund Offer (NFO) period.
Suitability	Ideal for SIP-based or goal-oriented investing.	Suitable for investors seeking discipline and a long-term lock-in.
Fund Size	Variable; fund size increases or decreases with investor inflows and outflows.	Fixed fund size determined at the time of NFO.
Emotional Behaviour	Investors often exit early during market volatility or fear.	Encourages long-term investing by restricting premature exits.

Why are Close Ended Funds not as Popular as Open Ended Funds?

Despite some meaningful advantages, close ended funds have not gained mainstream popularity.

Reasons include:

Investors prefer liquidity
SIPs are the most common investing style in India
NFO-driven marketing often creates confusion
Trading on exchanges lacks depth and liquidity
Many investors do not want long lock-in periods

However, disciplined investors looking to capture long-term sectoral or debt themes may find value in them.

Who Should Invest in Close Ended Mutual Fund?

Close ended funds may suit investors who:

Have long-term horizons
Are comfortable locking money for 3-7 years
Want fund managers to take long-range positions
Prefer a disciplined approach
Understand sectoral or thematic investing cycles

They are not suitable for investors who require liquidity or want flexibility to exit anytime.

How to Invest in Close Ended Mutual Fund?

Investment happens primarily during the New Fund Offer:

Step 1: Track upcoming NFOs from AMCs
Step 2: Evaluate the theme, fund manager, and risk level
Step 3: Invest during NFO via broker, bank, or AMC website
Step 4: Units get allotted after NFO closes

Post-NFO, you may still buy units on exchanges-though liquidity tends to be low.

Conclusion

Whereas, close ended mutual funds might not be as flexible as open ended ones, the close ended funds provide a disciplined route since the investors are in a position to invest capital over a period of several years. Their predetermined maturity, unchanging capital, and long-term investment structure make them attractive to such themes as infrastructure, debt strategies, or economic cycles that require some time to run.

Learning about the close ended mutual fund meaning, the differences between these funds and the open ended ones, the close ended mutual fund example, and the assessment of the risks that the closed ended one could imply, the investors can make more appropriate decisions based on the purposes.

Close ended funds are however not appropriate to all. Retail investors might be constrained by liquidity, exchange-traded pricing, and lock-in constraints to want the freedom and the ability to ensure frequent changes. As usual, the selection of open ended and close ended mutual fund will be determined by your time horizon, financial discipline and risk appetite.

Also Read : Open Ended Mutual Funds: Meaning, Features & Comparison.