A common situation in a broking back office is receiving an urgent call from an HNI client who assumes they can redeem their entire holding in a closed-ended infrastructure fund during a sudden market downturn. When you explain that the fund is listed on the exchange and they must sell through the secondary market, the client’s confusion highlights a major operational friction point.
As a professional, you must differentiate between the daily redemption ease of open-ended funds and the market-dependent liquidity of closed-ended structures. An open-ended fund manages liquidity through the fund house via constant creation and redemption, while a closed-ended fund relies on active trading on the NSE or BSE to provide an exit for investors.
From an operations perspective, the settlement cycle for these two types of funds is fundamentally different. When a client redeems an open-ended scheme, the AMC processes the transaction based on the NAV of the day, with funds typically hitting the client’s bank account within a few working days. Conversely, selling a closed-ended scheme involves the same mechanics as selling equity shares: order matching, trade execution on the exchange, and T+1 settlement cycles.
This means the client is exposed to ‘price risk’—the difference between the current NAV and the market price, which often trades at a discount to the actual net asset value.
For your team, this distinction is critical when managing client expectations and executing sell orders. If a client mistakenly believes a closed-ended fund is open-ended, they may set a market order without checking the order book depth, leading to an execution at an unfavorable price. Your role is to ensure the client understands that their liquidity is not guaranteed by the fund house, but by the availability of buyers on the exchange.
Misunderstanding this, or failing to warn a client about low trading volumes in certain closed-ended schemes, can lead to significant investor grievances and claims of poor advisory service.
Nuance
Check Your Understanding
An investor holds units in a closed-ended mutual fund scheme listed on the NSE. Which of the following statements accurately describes how the investor can exit this investment before the maturity date?
A client requests to redeem INR 5,00,000 worth of units from a closed-ended scheme that has been trading at a 10% discount to its NAV. What is the most critical operational factor you must communicate to the client?
This is a companion read for Section 1.4 — PRODUCTS TRADED IN THE INDIAN SECURITIES MARKET from PASS Securities Operations and Risk Management Examination by Akhilesh Gururani, available on Amazon Kindle.
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