Close-ended mutual fund

A close-ended mutual fund is a category of mutual fund scheme that, under the SEBI (Mutual Funds) Regulations, 1996, raises a fixed corpus through a one-time New Fund Offer (NFO), lists units compulsorily on a recognised stock exchange, and redeems them at a stated maturity date. Regulation 2(d) defines a close-ended scheme as a scheme of a mutual fund in which the period of maturity is specified, distinguishing it from the open-ended form defined in Regulation 2(s).

Close-ended schemes occupy a small and declining share of the Indian mutual fund industry. As of the financial year ended March 2025, the combined assets under management of close-ended and interval schemes were well under 5 per cent of total industry AUM of approximately Rs 65 lakh crore, against the dominant share held by open-ended schemes. The decline reflects three structural developments: the SEBI directive of 2014 that curtailed routine rollovers of Fixed Maturity Plans, the SEBI Scheme Categorisation Circular of October 2017 that sharply restricted new launches of close-ended equity schemes, and the Finance Act, 2023, that removed indexation benefit on debt mutual fund units, which had been the central economic case for the Fixed Maturity Plan.

The close-ended form is distinct from interval schemes, defined in the 2017 Categorisation Circular as schemes whose units are made available for subscription and redemption only during specified transaction periods. A close-ended scheme offers no in-scheme redemption window during its life; secondary-market sale on the listed exchange is the only liquidity option until maturity.

Definition and regulatory framing

Regulation 2(d) of the SEBI (Mutual Funds) Regulations, 1996, defines a close-ended scheme as a scheme of a mutual fund in which the period of maturity is specified, against the open-ended definition in Regulation 2(s) which expressly omits any duration for redemption. Regulation 33 applies the maturity-pay-out obligation: on the maturity date, the scheme must redeem all outstanding units at the then-prevailing NAV and remit proceeds within the timelines fixed by Regulation 53.

Regulation 32 imposes the mandatory listing requirement. Every close-ended scheme is required to list units on a recognised stock exchange, ordinarily within five working days of allotment. Listing is the principal substitute for in-scheme redemption and anchors close-ended-scheme regulation to the broader securities market apparatus governed by the SEBI Act, 1992. The Scheme Information Document must state the exact maturity date in either absolute or relative form, for example 1,096 days from allotment. The tenure may not be altered after launch except through scheme merger or formal winding-up under Regulation 39, both of which require trustee approval, SEBI intimation, and an exit option for dissenting unit-holders at NAV without exit load.

The legal personality is the same trust structure as for open-ended schemes: trustees hold the corpus under the Indian Trusts Act, 1882, with the AMC managing it under the investment management agreement and the SEBI Investment Management Department supervising both. What is distinctive is the role of the recognised stock exchange as the in-life redemption venue and the requirement of mandatory dematerialisation for trading.

Operational mechanics

The NFO is the sole subscription window. Once it closes, the scheme is shut for fresh inflows for the entire residual tenure, and the unit base is fixed. Units are allotted in proportion to subscriptions, subject to the minimum scheme size of Rs 20 crore for debt schemes and Rs 10 crore for equity schemes under Regulation 35. If minimum subscription is not met, the NFO is wound up under Regulation 39 and monies refunded within five working days, failing which the AMC pays interest at 15 per cent per annum.

After allotment, the scheme runs continuously to its stated maturity date. There is no continuous repurchase obligation under Regulation 33, and the AMC may not accept fresh subscriptions during the tenure. A unit-holder who wishes to exit before maturity has only one route, namely sale on the recognised stock exchange where units are listed. Direct redemption with the AMC is not permitted except at maturity, save where an interim exit window follows a fundamental attribute change. Listing is completed within five working days from allotment; most schemes list on BSE Limited, the National Stock Exchange of India Limited, or both, with an ISIN assigned for trading in the cash segment.

Most close-ended schemes trade at a discount to NAV, widening for less liquid or longer-tenure schemes and narrowing as the scheme approaches maturity. The 1996 Regulations require close-ended schemes to compute and disclose NAV at least on a weekly basis; in practice, most AMCs publish daily NAV through the AMFI NAV file, although the regulatory floor remains weekly. Daily NAV publication, mandatory for liquid funds, is not applicable because there is no daily subscription or redemption to which NAV would attach. Redemption at maturity is at the NAV declared on that date, with proceeds despatched within 10 working days under Regulation 53.

Categories of close-ended schemes in India

Fixed Maturity Plan

The Fixed Maturity Plan (FMP) is the historically dominant variant. An FMP is a close-ended debt scheme whose portfolio consists of debt securities with residual maturity matched to the tenure of the scheme. A 91-day FMP typically holds treasury bills and short-tenor commercial paper; a three-year FMP holds AAA-rated corporate bonds and government securities maturing close to the scheme’s maturity date. The buy-and-hold strategy eliminates reinvestment risk within the scheme and yields a relatively predictable return profile, although the return is not guaranteed.

Capital Protection Oriented Scheme

A Capital Protection Oriented Scheme is a close-ended hybrid scheme that combines a high-quality fixed-income tranche sized to grow to the original principal at maturity with a smaller equity tranche for upside participation. SEBI Regulation 33A, introduced in 2006, requires such schemes to carry a rating from a SEBI-registered credit rating agency, typically CRISIL, ICRA, CARE Ratings, or India Ratings, reviewed quarterly. The capital-protection feature is achieved by portfolio architecture, not by a guarantee; the rating attests to probability rather than assurance.

Close-ended equity

Close-ended equity schemes were a common product category between 2005 and 2017, typically marketed with three-year or five-year tenures and portfolios drawn from listed equity in defined themes such as infrastructure, banking, or mid-cap growth. The Rajiv Gandhi Equity Savings Scheme (RGESS) era of 2012 to 2017 produced a sub-segment of close-ended equity products structured for Section 80CCG eligibility. The 2017 Scheme Categorisation Circular sharply restricted fresh launches, on the ground that the open-ended categorisation framework already covered the legitimate diversity of equity strategies.

Close-ended hybrid and close-ended ELSS

Close-ended hybrid schemes combined an FMP-style locked-in debt portfolio with a smaller equity overlay; the category has largely been subsumed into Capital Protection Oriented Scheme labelling since 2008. Close-ended Equity Linked Savings Schemes were permissible until 2016, structured with three-year tenures matching the statutory ELSS lock-in. SEBI prohibited fresh launches thereafter, requiring all new ELSS launches to be open-ended; existing close-ended ELSS schemes continued to maturity. The open-ended ELSS category absorbs the entirety of new flows.

Infrastructure Debt Fund

The Infrastructure Debt Fund (IDF), introduced under SEBI’s IDF framework of 2011 and re-notified as part of the 2014 amendments, is a specialised close-ended structure for long-tenor infrastructure debt. IDFs typically run for 5 to 10 years and are restricted to investors meeting prescribed minimum-investment thresholds; retail subscription is not the operative channel. The IDF framework is separate from the mainstream close-ended FMP framework, although both rest on the close-ended definition of Regulation 2(d).

NFO mechanics

The NFO of a close-ended scheme may remain open for a maximum of 15 days under Regulation 34. The Scheme Information Document, Statement of Additional Information, and Key Information Memorandum are filed with SEBI for observations before launch. Allotment is required within five working days from NFO closure. Application monies are held in escrow with the banker to the issue until allotment; the corpus is then transferred to the scheme account against issuance of units. Allotment is by credit to the demat account for demat-mode investors and by Statement of Account from the Registrar and Transfer Agent for physical-mode investors; the latter must convert to demat before any secondary-market sale. Listing follows within five working days from allotment.

Listing and exchange trading

Mandatory listing on at least one recognised stock exchange is the operational substitute for in-scheme redemption. Regulation 32 admits no delisting before maturity except in connection with formal winding-up. Trading typically occurs at a discount to NAV, varying by category, tenure, and credit-quality profile, with broker studies during 2010 to 2018 recording average discounts of 4 to 8 per cent for listed FMPs and up to 12 per cent on longer-tenor schemes; the last 30 days before maturity typically see a discount of less than 1 per cent.

Liquidity in the secondary market is poor for most close-ended schemes. Average daily traded units have historically been a small fraction of total outstanding units; a scheme with 20 crore units may trade only a few thousand units on a typical day, with many days recording zero volume. Investors selling on the secondary market face impact cost on top of the structural discount, so listing provides legal exit but not always commercially viable exit. The 1996 Regulations as amended in 2008 require conversion to dematerialised form before any tender on the exchange; physical-mode holders may exit only at maturity through the AMC route, which constitutes a de-facto lock-in.

Comparison with open-ended schemes

The close-ended form differs from the open-ended form principally in liquidity architecture and NAV-disclosure cadence, although both share the same trust legal personality and operate under the 1996 Regulations. Open-ended schemes suit investors who place a premium on daily liquidity; close-ended schemes suit investors who can accept maturity wait in exchange for an in-scheme yield lock or a particular portfolio structure.

Cut-off times do not apply during the residual tenure, because there is no in-scheme subscription or redemption. The SEBI cut-off-time framework applies only at NFO subscription and at maturity redemption, both processed at the closing NAV of the relevant business day. The Total Expense Ratio is governed by the same Regulation 52 slab structure as the open-ended form; in practice, AMCs charge a lower TER on close-ended FMPs because the buy-and-hold strategy entails minimal trading.

Specific scheme variants in detail

Fixed Maturity Plan

The FMP buys and holds a debt portfolio to maturity, eliminating reinvestment risk within the scheme tenure. The fund manager identifies a basket of debt instruments with residual maturity close to the scheme’s maturity date, purchases them during or shortly after the NFO, and holds them to redemption. Yield is relatively predictable but not guaranteed: credit events affecting any holding can impair the maturity NAV. Tenures range from 91 days to five years, with the three-year tenure historically the most common. The three-year FMP, before the 2023 tax change, invested in highly rated corporate bonds with residual maturity of approximately 1,096 days, capturing the long-term capital gains tax bracket and the associated indexation benefit.

Capital Protection Oriented Scheme

A Capital Protection Oriented Scheme combines a high-quality debt tranche, sized to grow to the original principal at maturity, with a smaller equity tranche for upside participation. The debt tranche is typically composed of AAA-rated corporate bonds, certificates of deposit, and treasury bills; the equity tranche of large-cap equity, an equity index basket, or equity derivatives. There is no guarantee from the AMC, the trustee, or the sponsor; the SEBI advertising code requires prominent disclosure of this fact. The CRISIL AAAmf(SO) rating and equivalent ratings from ICRA, CARE Ratings, and India Ratings, reviewed quarterly, attest to the probability of capital protection.

Infrastructure Debt Fund

The Infrastructure Debt Fund (IDF) is governed by a separate framework added to the 1996 Regulations in 2011 and revised in 2014. The SEBI-structured IDF takes the close-ended mutual fund form, with tenures of 5 to 10 years and investment in operational infrastructure assets. Eligible investors are limited to qualified institutional investors and high-net-worth individuals meeting a prescribed minimum investment of Rs 1 crore; retail subscription is not permitted.

Taxation

Fixed Maturity Plan and debt close-ended schemes

The Finance Act, 2023, with effect from 1 April 2023, amended Section 50AA of the Income-tax Act, 1961, so that gains on transfer of units of a specified mutual fund acquired on or after that date are treated as short-term capital gains regardless of holding period, taxed at the unit-holder’s slab rate. The long-term capital gains category and the associated indexation benefit, which had historically applied to debt mutual fund units held for more than 36 months under Section 112, were withdrawn for fresh acquisitions. A unit-holder who acquired FMP units before 1 April 2023 continues under the pre-amendment regime. The change is treated in detail in debt mutual fund taxation 2023 and debt MF indexation removal in FY24.

Close-ended equity schemes

A close-ended equity scheme is treated as equity-oriented for tax purposes if it invests at least 65 per cent of net assets in domestic equity. Short-term capital gains on units held for less than 12 months are taxed under Section 111A at 20 per cent with effect from 23 July 2024; long-term capital gains on units held 12 months or more are taxed under Section 112A at 12.5 per cent on aggregate gains exceeding Rs 1.25 lakh per financial year. The standard equity mutual fund taxation framework in India applies in full.

Capital Protection Oriented Scheme

A Capital Protection Oriented Scheme typically holds more than 80 per cent of its assets in debt instruments. It is therefore treated as a debt fund for tax purposes, attracting the post-1 April 2023 Section 50AA regime: gains taxed at slab rate regardless of holding period.

Historical role and decline in India

The Indian close-ended form was prominent during 2007 to 2014, driven by a benign short-term rate cycle in which rolling 91-day to one-year FMPs offered indicative yields above traditional savings instruments while remaining within the debt mutual fund tax bracket. AMFI data records close-ended schemes peaking at approximately 15 to 18 per cent of total industry AUM by 2013.

The SEBI directive of September 2014 curtailed the routine practice of rolling over an FMP at maturity into a successor FMP, which had effectively created a perpetual debt holding while retaining the close-ended tax classification. Under the revised framework, any extension required explicit unit-holder approval through a polling exercise, with dissenting unit-holders entitled to an exit at NAV without load. The SEBI Scheme Categorisation Circular of October 2017 imposed the second restriction, reorganising the open-ended categories into a one-per-AMC framework and making open-ended schemes the preferred default form. Fresh launches of close-ended equity schemes effectively halted from late 2017.

The Finance Act, 2023, completed the structural displacement. By withdrawing indexation benefit and the long-term capital gains tax bracket on debt mutual fund units acquired on or after 1 April 2023, the legislation removed the central economic justification for the close-ended FMP. A retail investor in the highest tax bracket could no longer derive a tax advantage from a three-year FMP over a fixed deposit. NFO activity in close-ended FMPs collapsed during financial year 2024 and remained subdued through financial year 2025. The industry AUM share of close-ended and interval schemes has fallen from over 15 per cent in 2014 to under 5 per cent by March 2024, according to AMFI monthly data. A fuller chronology is in the history of mutual funds in India and the mutual fund industry in India.

Notable events

The 2014 Amtek Auto FMP exposure was the most prominent credit episode involving Indian close-ended debt schemes. Several FMPs of JPMorgan India Mutual Fund and other AMCs held bonds of Amtek Auto Limited; following the company’s August 2015 default, the affected FMPs faced material impairment to portfolio value. The episode, treated in detail in JPMorgan India Amtek Auto exposure 2015, prompted the side-pocketing framework of 2018 and stricter credit-concentration limits, although those reforms applied principally to open-ended debt schemes. The Karvy Stock Broking pledge-misuse episode of 2019 affected unit-holders whose close-ended FMP folios were held through Karvy Computershare’s RTA arrangements, prompting SEBI’s tightening of RTA controls and segregation requirements; see Karvy RTA pledge-misuse 2019.

Criticism and limitations

Poor secondary-market liquidity is the primary critique of the close-ended form. Mandatory listing under Regulation 32 provides a legal exit route, but trading volumes are insufficient to absorb meaningful redemption demand; a holder of even modest size encounters wide bid-ask spreads and material impact cost on top of the structural discount. The persistent discount to NAV imposes a hidden cost on in-life exit, borne entirely by the seller rather than shared across unit-holders as in the open-ended form. Average discounts of 4 to 8 per cent on listed FMPs imply that a holder who exits midway through a three-year FMP forfeits a material portion of the indicative yield, eroding the comparative advantage relative to a bank deposit with premature-withdrawal penalty.

Mandatory exit only at maturity also creates reinvestment timing risk. The FMP holder receives lump-sum proceeds at maturity, which must be redeployed at the prevailing yield curve, potentially materially lower than the yield at which the FMP was purchased; the reinvestment risk eliminated within the scheme by buy-and-hold is therefore transferred to the investor. The mutual fund risk-o-meter framework in India addresses portfolio risk but not this timing-of-maturity risk. Critics, including the Association of Mutual Funds in India in periodic submissions to SEBI, have argued that the residual category is best wound down through natural maturity rather than refreshed through new launches.

See also

• Open-ended mutual fund
• SEBI (Mutual Funds) Regulations, 1996
• SEBI Scheme Rationalisation Circular 2017
• SEBI Act, 1992
• SEBI Investment Management Department
• Mutual fund industry in India
• History of mutual funds in India
• Mutual fund NAV
• Total Expense Ratio in Indian mutual funds
• Mutual fund cut-off times
• ELSS mutual funds in India
• Debt mutual fund taxation 2023
• Debt MF indexation removal in FY24
• Equity mutual fund taxation in India
• STCG on equity mutual funds under Section 111A
• LTCG on equity mutual funds under Section 112A
• Mutual fund risk-o-meter in India
• AMFI, Association of Mutual Funds in India
• Karvy RTA pledge-misuse 2019
• JPMorgan India Amtek Auto exposure 2015

References

1. SEBI (Mutual Funds) Regulations, 1996, Gazette of India Extraordinary, Part II, Section 3, 9 December 1996, as amended.
2. SEBI Categorisation and Rationalisation of Mutual Fund Schemes, Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, 6 October 2017.
3. SEBI Circular on Listing of Close-ended Schemes, SEBI/IMD/CIR No. 12/147132/08, 11 December 2008.
4. SEBI Circular on Rollover of Close-ended Schemes, SEBI/HO/IMD/DF2/CIR/P/2014, September 2014.
5. SEBI Capital Protection Oriented Schemes framework, Regulation 33A of the SEBI (Mutual Funds) Regulations, 1996, inserted 2006.
6. SEBI Infrastructure Debt Fund framework, Chapter VI-B of the SEBI (Mutual Funds) Regulations, 1996, inserted 2011 and amended 2014.
7. SEBI Master Circular for Mutual Funds, SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/74, 19 May 2023, with amendments through 27 June 2024.
8. Finance Act, 2023 (Act No. 8 of 2023), amendment to Section 50AA of the Income-tax Act, 1961.
9. Finance (No. 2) Act, 2024 (Act No. 15 of 2024), amendments to Sections 111A and 112A.
10. SEBI Annual Report 2023 to 24, Mumbai, August 2024.
11. AMFI Monthly Industry Data, March 2025.
12. SEBI Order in the matter of Karvy Stock Broking Limited, WTM/MPB/EFD-DRA3/9377/2019, 22 November 2019.