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Open Ended vs Close Ended Mutual Fund Schemes

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Choosing between open ended and closed ended mutual funds is one of the first decisions investors make when building a portfolio. While both types invest in a range of market-linked securities, they differ in terms of investment flexibility, liquidity, fund tenure, and how investors can buy or redeem units. Understanding the difference between mutual fund open ended and closed ended schemes can help you select an option that aligns with your financial goals, investment horizon, and risk appetite. In this guide, we compare open vs closed end funds, their features, benefits, limitations, and key differences to help you make an informed investment decision.

What is an Open-Ended Mutual Fund?

Open-ended mutual funds are those mutual fund schemes commonly understood as mutual funds. This means these funds don't trade in the open market, and there is no limit on the number of units one can issue. The NAV (Net Asset Value) changes daily due to the share/ stock market fluctuations and the bond prices of the fund.

Open-ended mutual funds are purchased and sold on demand at their NAV. Net Asset Value depends on the value of the fund's underlying securities, and it is calculated at the end of every trading day. These investments are valued as per the fair market value and don't have the restriction of a fixed maturity period. Hence, investors buy these units directly from a fund.

Investors who seek high liquidity can consider investing in open-ended mutual fund units as they don't have restrictions on the number of units that can be purchased or redeemed. However, open-ended mutual funds allow an exit load when an investor redeems the units of these schemes.

Pros and Cons of Open Ended Mutual Funds

The table below shows the pros and cons of open ended mutual funds:

Pros of Open Ended Mutual Funds	Cons of Open Ended Mutual Funds
High liquidity, as investors can buy or redeem units on any business day at the prevailing NAV.	Returns are subject to market fluctuations and are not guaranteed.
Suitable for SIPs and lump sum investments, offering flexibility in investment amounts.	Frequent buying and selling by investors may affect the fund's cash management.
No fixed maturity period, allowing investors to stay invested for the long term.	Some schemes may charge an exit load for redemption within a specified period.
Professionally managed portfolio with diversification across multiple securities.	Fund managers may need to maintain cash reserves to meet redemption requests, which can impact returns.
Available across various categories, making it easier to choose funds based on different financial goals.	Investment decisions require regular monitoring to ensure the scheme continues to meet your objectives.

What is a Closed-Ended Mutual Fund?

Closed-ended mutual funds assign a predetermined number of fund units to be traded on stock exchanges. These mutual funds function more like an Exchange-Traded Fund (ETF). Closed-ended mutual funds are issued via a new fund offer (NFO) to raise money. They are then traded in the open market, just like stocks. The value of closed-ended stocks is based on the NAV as well. However, the actual price of these mutual funds is equivalent to the supply and demand. And it can trade at prices more or less than its real value.

As a result of which, close-ended mutual funds are allowed to trade at discounts or premiums to their net asset values (NAV). Brokers become a medium for purchasing and selling units of closed-ended mutual funds. These mutual funds trade at discounted rates to their underlying asset value and come with a fixed maturity period.

Investors seeking to exit close-ended mutual fund schemes can choose to sell the units in the open market. However, as these funds have limited liquidity, finding a seller at one's desired price can take some time and effort.

Close-ended funds offer the option of buying back the units after a specific time, allowing investors to choose an exit route prior to the date of maturity.

Pros and Cons of Closed Ended Mutual Funds

Like open and closed end mutual funds, closed-ended schemes have their own set of advantages and limitations. The table below highlights the key pros and cons of closed-ended mutual funds to help you compare them as part of your open vs closed end funds investment decision.

Pros of Closed Ended Mutual Funds	Cons of Closed Ended Mutual Funds
Fixed maturity period encourages disciplined, long-term investing.	Limited liquidity, as units generally cannot be redeemed before maturity.
Since fund managers do not face frequent redemption requests, they can focus on long-term investment strategies.	Investors may need to sell units on the stock exchange before maturity, where prices can differ from the NAV.
Suitable for investing in relatively less liquid assets due to a stable corpus.	Limited investment window, as subscriptions are usually available only during the New Fund Offer (NFO).
Potential to benefit from long-term market growth without frequent inflows or outflows.	Lower trading volumes on stock exchanges may make it difficult to buy or sell units easily.
Can help reduce impulsive withdrawals, supporting long-term wealth creation.	Less flexibility compared to mutual fund open-ended and closed-ended schemes that allow ongoing investments and redemptions.

Difference Between Open-Ended and Close-Ended Mutual Funds

It is important to know about investment plans options before investing. Open-ended vs close-ended mutual funds have many differences like:

Parameters of comparison	Open-ended	Close-ended
Basic definition	Open-ended mutual funds offer distinct units to investors constantly.	Close-ended mutual fund schemes offer new units to investors, But for a limited time period.
Investment	One can invest in open-ended mutual funds through SIPs or lumpsum.	Only lumpsum investments are allowed. No option for SIPs.
Subscription	It is available for subscription all year round.	It is available for subscription only on particular assigned days.
Maturity	There is no fixed maturity period.	Have a fixed maturity period of 3-5 years.
Transactions	Open-ended mutual funds are executed at the end of the day	Close-ended mutual funds have real-time execution
Listing	Not listed on any stock exchange. They are handed directly via the fund they are listed under	These are listed on a regulated stock exchange platform
Tax Benefits	ELSS tax benefits	No tax benefits
Analysis	Possible to compare and analyze based on the scheme records	No records are available. Hence it is not possible to compare or analyze
Fund Control	Fund managers have limited fund control	Fund managers have complete control over the portfolio
Assets Under Management (AUM)	The AUM constantly keeps changing	Have fixed AUM
Size of Issuing	Unlimited	Limited
Corpus	Variable corpus	Fixed corpus

Should You Choose Open-Ended or Close-Ended Mutual Funds?

The choice between open ended and closed ended funds depends on your investment goals, liquidity needs, and risk appetite. Here are a few points to help you decide:

Choose open-ended mutual funds if you want the flexibility to invest or redeem units at any time.
Choose closed-ended mutual funds if you are comfortable locking in your money for a fixed tenure and have long-term financial goals.
If you plan to invest through SIPs or make regular investments, open-ended schemes are generally more suitable.
If you prefer a disciplined investment approach with minimal withdrawals, closed-ended schemes may be a better fit.
Consider your liquidity requirements before investing, as closed-ended funds typically do not allow redemption before maturity.
Compare the features of open-ended and closed-ended funds carefully, including investment horizon, liquidity, and risk, before making a decision.
Review the scheme's investment objective, portfolio, historical performance, and expense ratio, regardless of the fund type you choose.

Conclusion

If you want to choose between open-ended vs close-ended mutual funds, it depends upon your needs and preference for returns, etc. If you can afford to stay invested for the long term, you can invest in close-ended mutual funds. Close-ended mutual funds will provide stability and high returns. They also allow investors to invest lumpsum amounts.

And if you want liquidity, choose open-ended mutual fund schemes. These mutual funds are perfect for investors who have minimum market knowledge. And for those who seek an annual rate between twelve to fifteen percent.

Key Takeaways

Open-ended mutual funds offer greater flexibility and liquidity, allowing investors to buy or redeem units at any time based on the prevailing NAV without a fixed maturity period.
The choice between open-ended and close-ended funds depends on investment goals and liquidity needs, with open-ended funds generally preferred for their accessibility, diversification, and long-term investment flexibility.

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What is the difference between open-ended and close-ended funds?

Open-ended mutual funds allow investors to buy and redeem units at any time, whereas close-ended funds have a fixed maturity period and generally do not allow redemption before maturity.

Can open-ended funds be redeemed?

Yes. Open-ended mutual funds can be redeemed on any business day at the prevailing Net Asset Value (NAV), subject to applicable exit loads, if any.

Is SIP open-ended?

Yes, SIPs (Systematic Investment Plans) are primarily available in open-ended mutual funds, allowing investors to invest regularly without a fixed investment tenure.

Is ELSS a closed-ended fund?

No. Most ELSS (Equity Linked Savings Scheme) funds are open-ended mutual funds. However, they come with a mandatory three-year lock-in period for each investment to avail tax benefits.

What is NAV in mutual funds?

NAV (Net Asset Value) is the per-unit value of a mutual fund. It is calculated by dividing the total value of the fund's assets minus liabilities by the total number of outstanding units.

What kind of securities do close-ended funds invest in?

Close-ended funds invest in a diversified portfolio of securities such as equities, bonds, money market instruments, or a combination of these, depending on the scheme's investment objective.

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The products are underwritten by Tata AIA Life Insurance Company Ltd.
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This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
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Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.