Closed-End Fund

Definition: The Closed-End Fund or CEFs is essentially the publicly traded investment company that issue the fixed number of shares through the initial public offerings (IPO). In other words, the investment companies that raise their fixed amount of capital by trading their shares on an exchange, just like stock, is called as a closed-end fund.

The unit capital of a closed-end fund is fixed, and a certain number of shares are sold to the investors. This means neither a new investor can enter, nor an existing investor can exit till the term of the scheme ends. But in case, the existing investor needs to exit the closed-end scheme, the fund house can trade his funds on a stock exchange.

The price of units can although be determined through its net asset value, but actually, the price of shares is affected by the demand and supply forces acting in the open market.

The closed-ended fund shares are traded on an exchange, and therefore, they are priced throughout the trading day. The share price is ascertained through the demand and supply fundamentals, and hence, the shares are traded at a significant discount or premium to their net asset value.

One of the advantages of using the closed-end scheme is that the most of these products use leverage to produce more gains, which means the borrowed money yields bigger returns to the investor. But, however, more usage of the borrowed money can put the closed-end fund under intense pressure.