Sharekhan Blog

What is the Difference Between Open-Ended and Close-Ended Mutual Funds?

  • Jan 31, 2024

This means investors can buy units any time of the year, and there's no limit on the quantity of units or the fund size they can buy. However, the best part is that every new unit is generated with the time invested in the fund. Moreover, these units' Net Asset Value, or NAV, is calculated at the end of every trading day.

Unlike stocks, open-ended mutual fund units aren't traded on stock exchanges. Transactions, whether buying or selling, occur directly with the fund house. Investors acquire units from the fund house and when opting to liquidate their investment, sell them back to the same entity. This distinct structure distinguishes open-ended mutual funds, offering investors flexibility and daily NAV adjustments in response to market dynamics.

Advantages of Open-Ended Mutual Funds

Open-ended mutual fund offers many benefits: -

1.    Flexibility in Investment and Redemption

Investors benefit from the scheme's flexibility, offering convenient options for both investment and redemption. This allows individuals to tailor their investment approach based on their financial goals as well as market conditions.

2.    High Liquidity for Convenient Market Entry and Exit

The scheme stands out for its high liquidity, providing investors with the ease of entering and exiting the market at their convenience. This attribute is particularly valuable for those seeking flexibility in managing their investment portfolios.

3.    Risk Spread through Portfolio Diversification

Investors enjoy the advantage of risk spread through portfolio diversification. This feature allows for a more balanced and resilient investment strategy, mitigating potential risks associated with the volatility of specific assets.

4.    Affordability and Rupee Cost Averaging with SIP

The scheme is an affordable investment avenue eligible for Systematic Investment Plans (SIP). This facility enables investors to benefit from rupee cost averaging, making it an accessible and strategic choice for long-term wealth creation.

What are Closed-Ended Mutual Funds?

A closed-ended mutual fund is when an individual investment is locked for a particular period. Apart from that, investors can subscribe to this fund scheme only during the new fund offer period or NFO. However, the units can be redeemed only after the lock-in period or when it matures.

Remember, some closed-ended funds can also become open-ended once their lock-in period is complete. But for that, the consent of the investor is required for the said closed-ended fund.

Advantages of Closed-Ended Mutual Funds

1.    Stability in Close-Ended Schemes

Close-ended schemes offer reasonable stability due to their unique structure. These funds' asset base and valuation are not subject to rapid changes, providing investors with a more predictable investment environment.

2.    Insulation from Large Inflows and Outflows

This type of fund is not vulnerable to large inflows and outflows, distinguishing it from its open-ended counterparts. The closed nature of the scheme helps maintain a more consistent and controlled fund size, reducing the impact of sudden market movements.

3.    Compounding Benefits for Long-Term Investors

Investors in close-ended schemes stand to benefit from compounding advantages by remaining invested for the long term. This characteristic aligns well with a patient investment approach, allowing for the potential growth of wealth over an extended period.

4.    Managerial Expertise Uninhibited by Redemption Pressure

The fund manager of a close-ended scheme can exercise their expertise without the pressure of redemptions affecting decision-making. With a fixed pool of investors, the manager can focus on strategic investment choices without being swayed by short-term market fluctuations.


Difference Between Open-Ended and Close-Ended Fund?

Aspect

Open-Ended Funds

Close-ended Funds

Maturity Period

They have no fixed maturity period and are open for subscriptions as well as redemptions.

Close-ended funds have a fixed maturity period that ranges from 3 to 15 years. Investors can only buy units during the initial offering period.

Availability of Units

Units are available for subscription throughout the year, and there's no limit on the number of units or the fund size. New units are created as investors enter the fund.

Units are issued only during the initial offering period. Once the offering period ends, no new units are created, and investors can only buy or sell existing units on stock exchanges.

NAV Calculation

The Net Asset Value (NAV) of open-ended funds is calculated at the end of each trading day, reflecting market forces of demand and supply.

NAV for close-ended funds is calculated periodically, often weekly or monthly, and is based on the market value of its underlying assets.

Trading on Exchanges

Open-ended funds are not traded on the stock exchanges. Investors buy and sell units directly with the fund house.

Close-ended funds are listed on stock exchanges, allowing investors to buy and sell units through secondary market transactions.

Fund Size Flexibility

Open-ended funds can expand or contract in size as new investors enter or existing ones exit.

The fund size for close-ended funds remains fixed after the initial offering, and the number of units is determined during the initial setup.

Liquidity

Open-ended funds offer high liquidity as investors can redeem their units at any time directly with the fund house.

Close-ended funds may have lower liquidity as secondary market trading depends on demand and supply. Investors may face challenges in selling units at market prices.


The Bottom Line

After going through the difference between open-ended and closed-ended funds, you might get an idea of which one you should choose per your needs and preferences. This means, if you want to stay invested for an extended period then opt for close-ended funds as it will offer stability and chances of high ROI. On the other hand, if you want liquidity, then open-ended funds will be an excellent choice. 

Team Sharekhan
by Team Sharekhan

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