Mutual funds in India can be classified into two categories, depending on their investment structure - open ended funds and closed ended funds.
The difference between open ended and closed ended mutual funds is determined by the level of investment flexibility and the ease of buying or selling them. While you can buy and sell open ended funds anytime, you can only buy closed ended funds at the time of their launch and you can redeem them only on the completion of fund investment tenure.
In this blog, we will discuss the nuances of open ended and closed ended funds which will help you decide which one suits you better.
What is an open-ended mutual fund?
Open-ended mutual funds, as the name implies, maintain an open door for both investments and redemptions. Their standout feature is liquidity, providing investors the freedom to enter or exit the fund whenever they choose, barring certain funds like ELSS which might have a mandatory lock-in period.
Investors can easily invest or redeem their units at the current Net Asset Value (NAV), which represents the fund's underlying asset value. The NAV is calculated daily based on the market value of the fund's holdings. This frequent valuation allows investors to have a clear picture of their investment's worth.
Open-ended funds come in various categories, catering to different investment goals and risk appetites. They offer a professionally managed portfolio of securities, which can include stocks, bonds, and other assets.
What are close-ended mutual funds?
Close ended mutual funds are available for subscription only during the new fund offer (NFO) period i.e., at the time of the scheme's launch. Close-ended funds are typically traded on secondary markets like stock exchanges.
Close ended mutual funds come with a stipulated maturity period. When you invest in a closed ended mutual fund scheme, your investment is locked in for a specified period of time. You can redeem the units only after the tenure of the scheme is over.
If you wish to exit the scheme, you have the option of selling the units in the secondary market. However, considering the closed-ended nature of scheme, they have limited liquidity and therefore it might become difficult to find a seller for your desired price.
However, certain close ended funds provide investors with the opportunity to repurchase units after a designated period, offering an exit option before the maturity date. Some close ended funds may also convert into open ended funds after the lock-in period is served or sometimes asset management companies may transfer the proceeds of closed ended funds after maturity to other open ended funds, with the prior approval of investors of close ended funds.
The lock-in period of the close ended funds ensures that the assets of the fund offer long-term growth potential.
The value of a fund is determined by its NAV, but the actual price at which it is bought and sold depends on supply and demand. This means the fund's price can be higher or lower than its true value. As a result, closed-end funds may be traded at prices that are either higher (premiums) or lower (discounts) than their NAVs.
Difference between open-ended & close-ended mutual fund:
Some of the key differences between open ended and closed ended mutual funds are as follows:
Comparison Basis |
Open ended funds |
Close ended funds |
Rationale |
Open-ended funds continuously issue new units to investors. |
Closed-ended funds offer a limited-time opportunity for investors to purchase new units. |
Subscription |
Investors can subscribe to these funds throughout the year. |
Investors can subscribe to funds during New Fund Offer (NFO) period. |
Ways of Investing |
You can choose to invest either through SIP or lumpsum. |
You can only invest via lumpsum mode. Investment via SIP is not available. |
Investment Amount |
Investment can be made with an amount as low as Rs. 500. |
Generally, the minimum investment amount is Rs. 5,000 for investing in a close ended scheme. |
Rupee Cost Averaging |
By using SIP, you can take advantage of the rupee cost averaging of the unit price. Even with lumpsum investment, you can benefit by investing at different market levels. |
You cannot take advantage of rupee cost averaging as these funds do not allow you to invest after the NFO period is over. |
Track Record |
You can invest in them by comparing and analysing the track record of the scheme you want to invest in with similar schemes. |
Since you can invest in these funds only during their NFO period, there is no track record available for you to comparison or analysis the performance. |
Maturity |
Open ended funds do not have a fixed maturity. |
Close ended funds come with a fixed maturity period. |
Liquidity |
They offer high liquidity. You can anytime buy or sell the units of the fund (except for the funds that come with a lock-in period). |
They offer no liquidity. You cannot buy or sell units during the lock-in period. You receive the redemption amount only at maturity. |
Price |
The price is determined by dividing the NAV by the total outstanding units. |
The price is determined based on the supply and demand. |
Assets Under Management (AUM) |
The AUM of open ended funds keeps on changing. |
The AUM of close ended funds is fixed. |
Open Ended vs Close Ended Mutual Fund: Which One Should You Choose?
The choice ultimately depends on your investment horizon, risk tolerance, and need for liquidity. If you value convenience and the ability to make changes to your investment position frequently, open-ended funds might be more suitable. If you're comfortable with a longer investment horizon and are drawn to a specific strategy, a close-ended fund might align better with your goals. It's recommended to carefully assess your financial objectives and consult with a financial advisor before making a decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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