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The mutual funds are broadly classified into two types based on the structure of the fund, namely open-ended funds and closed-ended funds. If you are not aware of the difference between the two and are wondering how it will affect your investment, read on to get your answers.
What Are Open-Ended Mutual Funds?
Open-ended mutual fund schemes buy and sell units of securities on a continuous basis, and thereby provide investors the flexibility to enter or exit the scheme at their own convenience. As an investor, you can purchase and trade even after the New Fund Order or NFO period. You can buy and sell the fund units at the NAV (Net Asset Value). The number of units may vary when the fund house purchases or sells the existing units. This is the primary reason why the unit capital of an open-ended mutual fund keeps fluctuating. The funds’ size expands when the fund house sells more units than it purchases as more money flows in and vice versa.An open-ended mutual fund is not obliged to sell the units always. For instance, if the fund management believes that it cannot manage the large-sized fund, then it can stop accepting new subscription requests. However, the fund house must purchase new units always.
What Are Closed-Ended Mutual Funds?
The closed-ended mutual funds issue a fixed number of units that are sold and purchased on the stock exchange. One of the significant differences between open ended and closed ended funds is that the latter prohibits the investors to buy the units after the NFO period is over.This implies that new investors cannot enter and the existing investors cannot exit the scheme until the end of its term. However, the fund houses list their closed-ended schemes on the stock exchange to facilitate the investors exit before the term.Trading on the stock exchange allows investors to purchase and sell the units through a broker in the same way as buying or selling a company’s shares. Additionally, since the trading takes place on the stock exchange, the number of outstanding units do not change. Apart from listing on a stock exchange, closed-ended funds also offer the investors to buy back the unit, thereby giving them additional liquidity.
Open-Ended Mutual Funds and Closed-Ended Funds – Knowing the Differences
Difference between open ended and closed ended fundsare listed in the table below:
| Difference Parameters | Open-ended mutual funds | Closed-ended mutual funds |
| Fund Management | The fund managers must stick to the objective of the scheme. Also, in open-ended mutual funds schemes, there is pressure on the fund manager as the investors have the liberty to redeem money. | In closed-ended mutual funds, there is no pressure on the fund manager as the investor cannot redeem the units till the end of the scheme tenure. |
| Maturity Period | These schemes do not have a fixed maturity term. | These schemes have a fixed maturity period, ranging from three to five years. |
| Listings | The scheme is not listed on the stock exchange. | These schemes are listed on the stock exchange. |
| Fund size | The fund size of the open-ended mutual funds schemes remains flexible. | The fund size of the closed-ended mutual funds schemes remains fixed. |
| Transaction timings | The transactions are done at the end of the day. | The transactions are carried out in real time. |
| Price determination | The shares are purchased and sold at the Net Asset Value declared by the fund. | The prices of the shares vary based on the demand and supply. |
Now that you know what open-ended and closed-ended mutual funds are and the difference between the two, you may be wondering which one to choose to invest in. The choice depends on your personal goal.But experts recommend the new and amateur investors to choose open-ended schemes as it gives them several benefits like ability to diversify the investment and maintain it as per their risk profile. Also, open-ended mutual funds provide better liquidity; you can redeem the units at any time. Final Word No matter, if you are an amateur investor or an experienced one, it is paramount that you understand the difference between the different types of mutual funds and make an informed investment decision.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
