Closed-end funds are those in which investors can buy units via the New Fund Offer by a fund house. No fresh units are available once the offer closes.

Units in open-end funds can be bought directly from the fund house on an ongoing basis.

Closed-end funds are propositioned as being ideal for those with a long-term investment horizon. Since purchase of units happens via a New Fund Offer, investments in the form of systematic investment plans will not be possible.

You won’t be able to sell the units you hold, back to the fund house in a closed-end fund. But these are listed and traded on stock exchanges, much like shares and exchange-traded funds. You will be able to sell units to other investors on the exchange. The value you realise will not only depend on the fund’s performance, but also on the demand for those units. Total expense ratios (TER) are higher for closed-end funds. Recently, the regulator placed a cap on TERs for closed-end funds.

Fund houses promote closed-end funds as not being subject to the vagaries of inflows and outflows that you could see in open-end funds. In the latter, investors can sell units back to the fund house.

If panic sentiment triggers redemption by a large number of investors in an open-end fund, the fund manager may be forced to sell assets at prices lower than might have been realised had the panic not set in. The value of the units may hence drop precipitously, leading to quick erosion of wealth for all investors.

Closed-end funds do not face such a problem as investments stay locked till maturity. This ostensibly allows fund managers the freedom to stay invested in, or choose assets they consider would give long-term returns.