Open Ended vs Closed Ended NFO: Key Differences Explained

When Asset Management Companies launch new investment schemes, they do so through NFO (New Fund Offers). These NFOs come in two main types: open-ended and closed-ended. Open-ended NFOs allow investors to buy and sell units anytime after the initial offer period ends, providing flexibility and liquidity. Closed-ended NFOs, on the other hand, have a fixed number of units available only during the offer period and come with a predetermined maturity date. Understanding the difference between these two structures helps investors choose the right option based on their financial goals and liquidity needs. In this article, we will explore the key features, advantages, disadvantages, and open ended NFO vs closed ended NFO difference.

What is an open ended NFO?

An open-ended NFO (New Fund Offer) allows investors to subscribe to a new mutual fund scheme, which will keep accepting investments after the NFO period ends. The fund becomes an open-ended mutual fund after the NFO period ends because investors can purchase or sell their units whenever they want at the current Net Asset Value (NAV). There is no restriction on the number of units that can be issued, making it highly flexible for investors seeking liquidity and continuous entry-exit options.

Pros and cons of open ended NFO

What are closed ended NFO?

A Closed Ended NFO is a New Fund Offer where investors can invest only during the initial subscription period. After that, the scheme remains locked for a fixed tenure. Redemption is generally allowed only after maturity, although units may be listed on stock exchanges for trading. Investors can exit the scheme by selling units on stock exchanges where they are listed, but liquidity may be limited. These NFOs are suitable for long-term investors who can commit funds for the entire investment period.

Pros and cons of closed ended NFO

Following are the pros and cons of open ended NFO vs close ended NFO.
 

Difference between open-ended and closed-ended NFO

The table below highlights the difference between Open ended NFO vs Close ended NFO: 
 

Choosing between open-ended and close-ended funds

Open-ended funds may be considered if:
 

• Access to liquidity is important to you.
  

• You prefer the ability to purchase or redeem units at the prevailing NAV.
  

• You value flexibility to make adjustments to your portfolio over time.
  

• You are considering investment routes such as SIPs or withdrawal options like SWPs.
   

Close-ended funds may be considered if:

• You are comfortable investing for a predetermined duration.
  

• Immediate liquidity is not a primary requirement.
  

• Your investment horizon is medium to long term.
  

• You are open to a fixed-tenure investment structure.

Conclusion

Different types of NFOs provide distinct investment solutions that meet the different requirements of investors. Investors who require immediate access to their funds may choose open-ended NFOs because these NFOs deliver flexible investment options and continuous access to their funds. Investors who want to maintain their investments over an extended period should consider closed-ended NFOs. They provide consistent fund management but restrict their ability to sell shares during the designated investment period. You should select your investment option based on your financial objectives, your anticipated investment timeframe and your need for liquid cash. You can make better investment choices when you understand these differences.