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Mutual funds can be categorized as per their structure. The structure decides whether they are close-ended or open-ended mutual fund schemes. The contrast between these two types of mutual funds is based on function, flexibility, and the ease of purchase and sale of these fund units.
A mutual fund scheme is introduced to investors via a mutual fund house through a New Fund Offer (NFO). One can invest in mutual fund schemes as long as the NFO period is valid. And once the period is over, further purchases by existing and new investors are not allowed.
The concept of NFO makes it easier to understand where mutual funds differ from one another. This blog discovers the concept of open-ended and close-ended mutual funds, the difference between open-ended and close-ended mutual funds, and gives you a takeaway on which one to choose.
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.
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.
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 |
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.
