Close-Ended and Interval Funds: A Pool That Stays Fixed

A close-ended scheme creates its units on one occasion and destroys them on one occasion, at maturity, so the count in issue never moves in between. An interval scheme runs the same way but reopens for stated windows. A holder who wants out before then sells to another investor at whatever that investor agrees to pay, and the scheme itself stays untouched.

Girnar Asset Management Limited, an invented fund house, runs the Girnar Large Cap Equity Fund, and that scheme is an open-ended one. No close-ended scheme sits alongside it to draw figures from. Rather than conjure a second scheme with figures nobody has checked, take the equity scheme's checked figures and supposeTo set a case out as an if, because the record does not contain a real instance of the thing being taught. the pool were fixed instead. Every rupee figure below is that supposition, labelled as one wherever it turns up. The mechanism is real. The scheme carrying it is a stated if.

Here are the figures being supposed. Net assets of Rs 4,200 crore. Units in issue of 120.00 crore. Divide the first by the second and one unit is worth Rs 35.00 exactly. One unit at Rs 35.00 is the computed value per unitTake what the pool is worth after debts and split it across every unit that exists. The division answers that one question and no other., and everything below turns on it. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations. The trustee company, the custodian, the registrar and transfer agent, the auditor and the distributor appear by role throughout and are never given names.

Three things are settled elsewhere, and none of them is rebuilt here. The meaning of a unit, the meaning of one unit's value and the roles standing behind any scheme are covered separately. The open-ended structure, in which the scheme itself takes money in and cancels units on the way out, is covered under the open-ended form. And the consequences of a unit count that cannot move are covered separately. The fixed pool is taught here in its own right: what it is, how units come into existence and go out of existence, and what a holder's route out actually looks like.

What makes a close-ended pool fixed, and which two events set it?

Two events, and that is the whole definition. A close-ended schemeA scheme that brings its units into existence on one occasion at launch and takes them out of existence on one occasion at the end, with no creation or cancellation in between. brings its units into existence once, when it is launched and money is collected. The scheme takes them out of existence once, at maturityThe stated end of a scheme, at which the holdings are turned into money and the proceeds go out to holders in proportion to units, after which no unit of that scheme exists., when what it holds is turned into money and paid out. In between, the count in issue holds still whatever anybody does. Not when someone leaves. Not when someone arrives. Not for any reason at all. Every other property of a fixed pool is a consequence of that single sentence.

The everyday shape of this is a chit that a group of neighbours starts together. Twelve households put in a stated amount on the day it opens, the group is closed the moment it starts, and a thirteenth household that hears about it a month later cannot join by handing money to the group. If they want in, they buy somebody else's place from that person, and the group's own arithmetic never notices. A fixed poolA pool whose unit count is set at launch and does not respond to anything holders do afterwards, so entering or leaving is a matter between investors rather than with the scheme. is that, with a custodian and a valuation.

Notice what the fixed count does to the two figures a holder sees. The units side of the computed value is frozen by construction. The net assets side is not: what the scheme holds still rises and falls with prices every valuation day, and expenses still run against it. So the computed value per unit still moves, day after day, exactly as it does in an open scheme. A fixed pool freezes the unit count, not the value of a unit, and confusing the two is the first wrong turn people take here. On the supposed figures, Rs 4,200 crore over 120.00 crore units is Rs 35.00 today because the numerator happens to be Rs 4,200 crore today, and nothing about the structure holds it there.

What does a pool nobody can call on hand to the manager?

A fixed pool hands the manager one thing and one thing only: nobody outside can force money out of the pool before the stated end. In an arrangement where holders leave by handing units back, every departure has to be funded, and funding it means turning holdings into cash on a day somebody else picked. In a fixed pool there is nothing for such a request to arrive at, so it never arrives. Kalyani Bhagat sells when the mandate says to sell and at maturity, and on no other date does an outsider set the timing. Nobody leaving ever picks the date on which holdings have to be turned into cash, and that is the whole of it.

One fact here gets stretched past what it says more often than any other. Not having to sell on demand is a property of the plumbing, not a statement about the person doing the choosing. Put the other way round it may land harder: take the same portfolio, the same Kalyani Bhagat and the same set of decisions and drop them into a pool that holders could leave at will, and nothing about the skill would change while only the timing of the selling would. A structural feature says what the structure permits. The feature says nothing about outcomes, and it is not a reason to expect any.

The everyday version is a vegetable seller who buys her stock on credit from the wholesaler and one who pays cash up front. The second one is never forced to sell a crate at whatever price the evening offers just because a payment falls due at six. Paying cash is a real difference in how the day can go. Paying cash is not a claim that she buys better vegetables, and nobody watching the two stalls should read it as one. The separation between what a structure does and whether it is good has to hold all the way through.

What does the same arrangement take away from a holder?

A fixed pool takes away the right to be paid by the scheme. The loss is that plain, and it deserves to be said without softening. In a fixed pool the route out before the stated end runs through another investor, not through Girnar Asset Management Limited. Somebody has to want the units, and the price is whatever the two parties settle on. If nobody wants them at a price the holder will accept, the holder holds on. Right up to the stated end, the figure the scheme publishes is information about the pool and not a sum any holder may demand. In an open scheme the two are the same thing; in a fixed pool they are not.

Where a scheme of this kind is listed, the exchange is simply the place a buyer is found rather than a different mechanism. Exactness about what changes hands matters here. A holder who sells a listed close-ended unit on an exchange receives the price the buyer agreed to pay, and does not receive the scheme's computed value per unit. The scheme is not on the other side of that trade and does not fund it. Any requirement to list a scheme of this shape, and the venues that would satisfy it, belong to the Securities and Exchange Board of India (SEBI) and live in the master circular for mutual funds, published at sebi.gov.in.

The restriction is not a virtue, whatever anyone selling it may say. A pool nobody can leave is sometimes described as saving people from their own worst instincts, and that is a story about behaviour, not a feature of the structure. The structure removes an option. Removing an option can suit a holder on a day panic would have won and can cost that holder on a day the money is genuinely needed, and which day arrives is not something a structure can tell in advance. Restricted exit is neither protection nor discipline; it is a smaller set of things a holder is able to do, and that is the honest description.

So what does the holder's record show? Two forms of it exist for a fixed pool, depending on how the units are held, and the useful observation is what neither of them contains. A statement of account maintained by the registrar and transfer agent carries the folio, the unit count and whatever figure the scheme last published for one unit. A depository account, at the National Securities Depository Limited (NSDL) or Central Depository Services (India) Limited (CDSL), carries the same unit count in electronic form so it can be transferred to a buyer. On the day either record is read no buyer has agreed to anything, so neither record has a line for what a buyer would pay.

Why can a price paid on an exchange sit away from the computed value?

Because the two numbers are made by different processes, by different people, in answer to different questions. The computed value per unit is an arithmetic result. On each valuation day the scheme values what it holds, subtracts what it owes, and divides by the units in issue. Rs 4,200 crore over 120.00 crore units is Rs 35.00. One number, produced by the scheme, identical for every holder, and nobody has to agree to it for it to exist.

A transacted priceThe amount one investor actually agreed to pay another for units. A transacted price exists only where a trade happened, and it describes that trade rather than the pool. is not an arithmetic result at all. A transacted price is the record of an agreement. The price exists only because somebody offered and somebody else accepted, and it says what those two settled on at that moment, with whatever each of them knew, wanted and needed. The two were never measurements of the same quantity, so a gap between them is not an error in the valuation. Asking which is correct is like asking whether the weight of a house or its asking price is the right number. Both are right. Each answers a different question.

Where does the gap come from, then? From everything that sits inside the second process and nowhere inside the first. A seller who needs the money this week will take less than one who does not. A buyer who wants into a pool where no new units are being created has to persuade an existing holder to part with theirs. Views differ about what the holdings will be worth later, and a price carries those views while a computed value does not. The computed value looks backwards at what the pool is. A transacted price is a forward looking bargain struck between two people, and that difference alone separates them.

How far a transacted price sits from the computed value, and how often it sits in either direction, can only be observed in a live market. No amount of arithmetic on the pool will produce that distance. Whether a fixed pool is easy or hard to get out of is likewise an observation rather than a structural fact. The places a fixed pool's units are permitted to move between investors, and on what terms, are settled by SEBI at sebi.gov.in.

What does the whole thing look like worked on real figures?

Suppose the pool is fixed at Rs 4,200 crore over 120.00 crore units, so one unit is worth Rs 35.00, and suppose a holder put Rs 1,00,000/- in on the day it launched. The figure is divided, not quoted. Rs 1,00,000/- over Rs 35.00 is 2,857.142857 and onwards without ending, and the scheme records it to three decimal places: 2,857.143 units. The rounding went upwards, and it leaves a residue that returns in a moment. The 2,857.143 units at Rs 35.00 come to Rs 1,00,000.005, half a paisa more than was handed over.

Now the holder wants out, well before the stated end. Girnar Asset Management will not cancel a single unit, so the holder finds a buyer. Suppose that buyer agrees Rs 33.00, and take the price as a stated supposition rather than a claim about what any unit trades at. The holder receives 2,857.143 multiplied by Rs 33.00, which is Rs 94,285.719 exactly, and Rs 94,285.72 once it is rounded to the paisa, upwards again by a tenth of a paisa. Against the Rs 1,00,000/- put in, that is Rs 5,714.28 less. As a percentage it is 5.71 per cent, and the base has to travel with it: 5.71 per cent of the Rs 1,00,000/- put in.

The other supposition runs the same way. A buyer at Rs 37.00 pays 2,857.143 multiplied by Rs 37.00. The product is Rs 1,05,714.291 exactly, and Rs 1,05,714.29 to the paisa, this time rounded downwards by a tenth of a paisa. The proceeds are Rs 5,714.29 more than was put in, and 5.71 per cent of the same base the other way. The two rupee figures are not identical twins: Rs 5,714.28 one way, Rs 5,714.29 the other. The single paisa between them is entirely the residue of rounding the unit count up at the start, and naming it is cheaper than pretending the arithmetic is tidier than it is.

A word of warning about checking this. Dividing Rs 5,714.28 by Rs 1,00,000/- gives 5.71 per cent. Dividing Rs 2.00 by Rs 35.00 gives 5.71 per cent again, and the agreement feels like confirmation. Do not take it as one. The two divisions are the same relation written twice: the unit count appears on the top and the bottom of the first and cancels straight out, leaving exactly the second. Two routes that agree because one is the other rearranged have checked nothing. Here is a check that genuinely bites. Work the shortfall per unit instead: Rs 35.00 less Rs 33.00 is Rs 2.00 a unit, and Rs 2.00 across 2,857.143 units is Rs 5,714.286, which rounds to Rs 5,714.29 and disagrees with the Rs 5,714.28 above by a paisa. The disagreement is correct and it is informative. The per unit route measures against the holding's computed value of Rs 1,00,000.005; the proceeds route measures against the Rs 1,00,000/- actually handed over. The half paisa between those two bases is what tips the rounding.

And now the part that carries the whole guide. In every one of these cases, including both in which the holder ended about Rs 5,714/- away from where they started, net assets stayed on Rs 4,200 crore, the count stayed on 120.00 crore units, and one unit stayed worth Rs 35.00. Neither the numerator nor the denominator was touched, so dividing again afterwards gives Rs 35.00 again. The deal was struck by two investors on their own account, and the scheme stood outside it from beginning to end. What the record cannot show is an ending, since that would call for an amount the holdings genuinely fetched, and no such amount is recorded.

How far can the two figures drift, and what forces them together?

Nothing in the structure caps the drift, and only one thing ends it. Before the stated end nothing inside a fixed pool connects a transacted price to the computed value, so nothing pulls the price back towards it. In an open scheme the connection is direct: units handed back are paid for by the scheme on the computed value, so the computed value is what the holder gets. Take that route away and the two figures are simply two numbers that happen to describe the same units.

The two figures are also, in principle, free to sit either side. On the supposed figures, a buyer at Rs 33.00 and a buyer at Rs 37.00 are the same distance from Rs 35.00, and put the holder 5.71 per cent behind or ahead of the Rs 1,00,000/- put in. The arrangement is symmetric, and any treatment that only ever draws the price below the computed value has quietly taught that one direction is the normal one. Which way a price actually leans is a matter for observation, not for structure.

The one thing that closes the gap is the stated end. At maturity the holdings become money and that money goes out to holders, so the amount a holder receives and the pool's arithmetic finally have to be the same statement. The two figures are free to sit apart every single day the scheme runs, and are not free to sit apart on its last one.

How does an interval scheme switch between its two behaviours?

By opening a door on a stated calendar and shutting it again. An interval schemeA scheme with a fixed unit count that reopens for stated periods, during which it will itself issue and cancel units, and outside which it behaves as a fixed pool. is a fixed pool for most of its life, exactly as described above, with one addition: at stated points it opens a windowA named stretch in which the scheme itself takes money in and pays money out on the computed figure, instead of leaving holders to deal with one another., and while the window is open the scheme itself will take money in and pay money out. The unit count, frozen the rest of the time, moves during a window and then freezes again.

A window changes one thing: the identity of the person on the other side of the transaction. Outside a window, a holder who wants out is looking for another investor and the price is whatever the two of them agree. Inside a window the scheme is the counterparty, and the transaction happens at the computed value per unit rather than at a negotiated price. That is the entire switch. The valuation does not change, the roles behind the scheme do not change, the portfolio does not change. Only who the holder is dealing with, and therefore what decides the price.

The everyday version is a co-operative store that sells shares to members. On ordinary days a member who wants out has to find another member willing to buy the share, and they haggle. On the two announced days a year when the store itself buys shares back, the member deals with the store instead and gets the value the store's books say the share is worth. The store did not become a different business on those days. The store simply stood on the other side of the counter.

Now the conditions attached to a window. How long a window stays open, how often windows come round, how much space has to sit between two of them, how much notice a holder gets before one opens, what deadline applies to an application made inside one, and whether a scheme of this shape has to be listed anywhere: every single one of those is a condition SEBI sets, and every one of them moves. Why those conditions exist is worth knowing, though. Each one exists so a scheme can plan for the money it will have to find, so a holder can find out in advance when a door opens, and so two holders in the same window are treated on the same footing. The values themselves live in the master circular for mutual funds and, for how a scheme of this shape is grouped and described, in the scheme categorisation circular. Read them at sebi.gov.in.

What actually happens to the pool at maturity?

The pool is realisedTurned into money. The scheme sells what it was holding, and what comes back from those sales is the amount there actually is to hand out. and handed over. The holdings are sold, what those sales bring in is the money the scheme has, and that money goes out to holders in proportion to the units each of them has. Then every unit is cancelled and the scheme stops existing. A fixed pool was never designed to carry on past its stated end, so there is no residue, no continuing entity and nothing left over. Maturity is not an exit from the scheme; it is the scheme finishing.

Everything about this shape is arranged around that one occasion, and the consequence is worth taking away. Until this moment a holder's outcome and the pool's arithmetic are two separate things, and one of them is a bargain with a stranger. At this moment what the holder receives is a share of what the pool actually turned into, so the two become the same thing. The pair may disagree throughout for exactly that reason, and the disagreement has nowhere left to go once the pool is handed out. Everything before that date is a description of the years in between.

One more condition sits at the end of a fixed pool's life. A scheme of this kind may sometimes be continued past its stated end rather than wound up, and a holder may be offered a choice at that point. Whether that is permitted, on what terms, what a holder has to be told and what a holder who wants no part of it can do are all conditions SEBI sets. Read them at sebi.gov.in. The structural point stands on its own: an extension does not turn a fixed pool into something else, it moves the date on which the two figures are forced together.

How much of an open scheme carries straight over to this one?

Nearly all of it, and this is the cheerful part. The trustee arrangement is the same: a trustee company holds the scheme for the people who hold its units. The custodian is the same, holding what the scheme has bought. The registrar and transfer agent keeps the holder records the same way. An auditor audits the accounts the same way. There is a written objective and a written policy the scheme has to stay inside, exactly as before. The pool has to be valued, exactly as before. The expense ratio runs against the pool day by day and is never billed to the holder, exactly as before. And the assets belong to the people holding the units, not to Girnar Asset Management, exactly as before.

Only the creation and cancellation of units differs, and the rest of what holds for an open scheme applies without amendment. The language around these structures makes them sound like different animals. A fixed pool and an open scheme are the same animal with a different door policy. The Girnar Broad Market Index Fund and the Girnar Large Cap Equity Fund are both open-ended on this record, but if either were reissued as a fixed pool tomorrow, the list above would not gain or lose a single line.

What cannot be worked out for a fixed pool, and what is being supposed instead?

Three things, and naming them is more useful than filling them in. The first is a close-ended scheme of its own: this record holds an open-ended equity scheme and an open-ended index scheme, and nothing else. Every fixed pool figure above is the equity scheme's checked figures run as a stated supposition, and the word supposed marks each one. A labelled supposition on checked figures teaches the mechanism better than an unchecked invention does.

The second is a transacted price. Rs 33.00 and Rs 37.00 are suppositions chosen because they sit either side of Rs 35.00 by the same amount and make the arithmetic legible. Neither is an observation, and where a unit of a fixed pool actually trades has to be read off a market rather than worked out. The third is a realised value at maturity, and that one is not merely absent but not computable from what is here. Producing it would need what each holding was sold for, the day each sale happened and what the realising itself cost. None of the three exists in this record, so no maturity figure appears and none is estimated.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.