There are different types of mutual funds in India, and all of them have one similar feature, that differentiates how investors look at them – It is open ended and close ended funds. The difference between the two is quite simple, and before we highlight the differences we’ll explain what are open ended and close ended funds.
What Are Open Ended Funds?
Open-ended funds are those that have a diversified portfolio made using investors’ wealth. Such funds have the ability to issue an endless supply of shares.
Open-ended funds buy/sell units to and from investors directly on a regular basis. A majority of mutual funds are open-ended funds, and their characteristics make them very appealing to retail investors.
Characteristics Of Open Ended Funds
Open-ended funds are the much more option in mutual funds. One of the characteristics that make open-ended schemes attractive is the no lock-in period. Investors can enter and exit anytime, along with some additional charges such as exit load fees.
- Open-ended funds are the most common investment option among mutual funds. Investors can redeem funds on any working day. This makes them highly liquid and attracts much more investors than close-ended funds.
- Examples of Open-ended funds include liquid funds and some other mutual funds, like tax funds, debt funds, etc.
- The units of open-ended funds are not traded on the stock market, and there is no limit on the number of shares a fund can issue. Although the mutual fund itself is not listed, its constituents might be. This creates volatility for the Net Asset Value (NAV) of the fund.
- The SIP feature of investing has truly changed how people can invest with very little money. Since open-ended funds are accessible to all, they constantly have inflows and outflows of units and cash.
Investors can enter anytime, with minimal investing capital, depending on the fund. They have the option to either invest a lumpsum amount at once or through SIP, regularly over time.
- Open-ended schemes are highly liquid due to their nature. This makes entry and exit from such funds smooth and easy. The same cannot be said for closed-ended funds, which have a fixed lock-in until maturity.
- Taking advantage of the open-ended feature, investors can go on adding or reducing units based on their requirements. The factor of rupee cost averaging also adds to the investor’s benefit. They can invest higher when the market is down, giving them more units for a lower price.
- You can check the performance of open-ended funds as they are openly managed by the AMC. The different schemes have a past performance record and it can be seen in various mutual fund brokerages.
What Are Close Ended Funds?
According to SEBI, close-ended funds are mutual funds with a fixed maturity date. Such funds are available only for a fixed period of time, at the time of launch. This launch period is called New Fund Offer (NFO).
Characteristics Of Closed Ended Funds
- A closed-ended fund is a mutual fund with a fixed number of units and a pre-determined maturity period.
- Investors cannot enter and exit closed-ended funds anytime and new shares will not be created anytime in the future. This also means that the fund will not take in more money after the NFO.
- Since closed-ended funds have a fixed number of investors, who cannot buy/sell units by will, the fund will be stable in terms of asset valuation. This also means that there won’t be heavy entries/exits that affect the fund.
- Closed-ended funds aren’t as popular as open-ended schemes. This is mainly due to the mandatory lock-in period and limited entry time, which can be a concern for most investors.
- Another reason for a lack of appeal by investors is a lump-sum investment. Closed-ended funds require investors to invest a lump-sum amount of money into the fund, which not every investor will have.
- Due to the lock-in period and fixed maturity, closed-ended funds are ideal for long-term investors who do not need to redeem their units even in emergency situations.
Open Ended And Close Ended Funds – Table Comparison
|Mutual funds with no lock-in period and maturity.
|Mutual funds collect funds through New Fund Offers at launch and are open only for a fixed period of time.
|When To Invest
|Open-ended Funds can be bought or sold anytime during working days.
|Investors can only invest during the NFO stage when they are actively looking for people to invest.
|They have very high levels of liquidity. Investors can buy and sell their units after incurring some exit load fees.
|Zero liquidity during the lock-in period.
|Open funds are tracked online so their past performance is available for all investors beforehand.
|Since the fund is only available during the NFO period, its performance does not have a track record.
|Rupee Cost Averaging
|The SIP form of investing allows for buying more units when the market is down.
|As investing is only possible through lump-sum, and shares are limited, investors cannot apply rupee cost averaging in a close-ended fund.
|Investors can start investing in an open-ended scheme for as little as 500 rupees
|One-time Lump sum investment redeemable after the lock-in period.
When you’re considering investing in a mutual fund, you should know the difference between open ended and close ended funds. Both have their advantages and it comes down to you, the investor, and your goals and mindset. If you don’t mind having your funds locked into a fund for the long term, and aren’t in need of that idle capital, close-ended funds would be ideal.
On the other hand, if you want to invest over time, don’t have large amounts of money for investing, or looking for different investments and only want to allocate a portion to mutual funds, open-ended funds seem ideal. We hope you had an informative and educational experience reading this article. Happy Investing!
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