Open Ended Vs Close Ended Mutual Fund Schemes

19 October 2023
4 min read
Open Ended Vs Close Ended Mutual Fund Schemes
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Mutual funds differ from each other primarily based on their investment structure. This fundamental aspect governs the flexibility and ease of buying and selling mutual fund units.

When the mutual fund house offers a new mutual fund scheme, the scheme is introduced to investors through a New Fund Offer (NFO). During this period, you can invest in mutual fund schemes. However, once the NFO period is over, the scheme might or might not allow further purchases by existing or new investors. 

It is where mutual funds become structurally different from open-ended and close-ended ones. This blog explores the critical differences between open-ended and close-ended mutual fund schemes.

Open-Ended Mutual Fund

  • Open-ended funds are what one knows as mutual funds. These funds do not trade publicly. However, they have no limit on the number of units they can issue. The NAV changes daily due to movements in the fund's share/stock market and bond prices.

  • Open-ended mutual fund units are traded on demand at their Net Asset Value, or NAV, which is determined by the fund's underlying securities and calculated at the end of each trading day. Units are bought directly from a fund by investors.

  • Open-ended fund investments are valued at fair market value, also the closing market value of listed public securities. These funds are likewise not restricted.

  • Investors seeking high liquidity may consider investing in open-ended mutual fund schemes that have neither restrictions on the number of units one may purchase or redeem nor have a maturity period. However, an exit load may be applicable when you redeem the units of open-ended schemes.

Closed-Ended Mutual Funds

  • Closed-ended mutual funds have a predetermined amount of fund units exchanged on stock exchanges. Close-ended funds operate more like exchange-traded funds (ETFs) than mutual funds. They are issued through a new fund offer (NFO) to raise funds and traded on the open market, analogous to stocks.

  • While the fund's worth is based on the NAV, the fund's actual price is proportionate to supply and demand. Thus, it could trade at higher or lower prices than its true value.

  • As a result, closed-end funds can trade at premiums or discounts to their net asset values (NAVs). Brokers are used to buying and selling closed-ended fund units. Closed mutual funds trade at a premium to their underlying asset value and have a predetermined maturity period.

  • Investors who seek to exit the scheme may sell the units in the open market. However, given the limited liquidity and the closed-ended nature, finding a seller for your desired price may also take time and effort.

  • Some close-ended funds offer an option of buying back the units after a specific time. It also allows investors an exit route before the maturity date.

Difference Between Open-ended and Close-ended Mutual Fund Schemes

Here are the critical difference between Open-ended vs Close-ended Mutual Fund Schemes-

Comparison Basis

Open-ended Funds

Closed-ended Funds

Definition

Open-ended funds are schemes that offer different units to investors continuously.

Closed-ended funds are mutual funds that provide new units to investors for a limited time.

Subscription

These funds are available for subscription all year

Some funds are only accessible for subscription on assigned days

Investment

You can invest through SIPs or lump sum.

You can invest only in a lump sum. SIPs are not available.

Transactions

Executed at day end

Real-time execution

Maturity

No fixed maturity

Fixed maturity period, usually 3 to 5 years

Liquidity provider

Funds itself

Stock Market

Corpus

Variable

Fixed

Price Determination

The price is calculated by dividing the NAV by the total outstanding shares.

Supply and demand drive price.

Listing

There is no stock exchange listing; transactions are handled directly through the fundThey are listed

ed for trading on a regulated stock market.

Issue Size

Unlimited

Fixed

AUM

The AUM of the fund constantly changes 

Fixed AUM

Tax Benefits

On ELSS investments

No tax benefits on investments

Fund Control

The fund manager’s control over the portfolio is limited because of the possibility of redemptions.    

The fund manager has complete control over portfolio management as the asset base is stable.

Analysis

You can compare and analyze similar schemes based on their records         

No record is available, so comparison or analysis is not possible

Which One Should You Choose?

The choice entirely depends on your investment needs and preferences.

If you can afford to stay invested for a more extended period, you can opt for close-ended funds that give you stability and chances of higher returns through the compounding of your money over time.

You will also require free lumpsum amounts to invest in closed-ended funds. On the other hand, if you want liquidity, open-ended funds may be a better option. 

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