Disadvantages of closed end funds

Closed end funds have two main disadvantages. Firstly, investors cannot redeem their units before maturity or lock-in period. Asset Management Companies can list their closed end funds in stock exchange, which allows the investors to buy and sell units of closed end funds in the secondary market. The units may trade at a premium or discount to the NAV. However, this facility only offers limited liquidity to closed end fund investors since they are dependent on the demand and supply situation for the fund in the secondary market. The second disadvantage of closed end funds is that investors cannot use systematic investment plan (SIP) to invest in closed end funds because of limited offer period. However, if you prepared to invest in lump sum and wait till the end of the lock in period, closed end funds can be excellent investment options.