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Close-ended vs open-ended which is better?

What are the advantages and disadvantages of investing in open-ended and close-ended mutual funds?

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3 Approved Answers

Pijush Kanti Biswas

Open ended funds are schemes that offer mutual fund units to the investors on a continuous basis. This means that the investors can buy units from, or sell units to the fund house at any time, thereby making the corpus of the fund variable. These funds also do not have a fixed maturity period.

Here are the advantages and disadvantages of investing in open-ended funds:

Close ended funds are mutual fund units that are offered to investors for a limited period only, that is, during the period of Initial Public Offer. These funds have a fixed maturity period.

Here are the advantages and disadvantages of investing in close-ended funds:

Weighting various advantages and disadvantages will help you to select right fund as per your investment goals.

Happy investing!

Tanya

  • Open ended mutual funds schemes- An open end mutual fund is the type of fund that does not have any restrictions on the amount of shares a fund can issue. Such schemes purchase and offer units at a daily basis and therefore, allow the investor to enter and exit as per his preference. The units are sold at the Net Asset announced and can be bought or sold even after the New Fund Offer (NFO) period.

Advantages of open ended mutual fund schemes:

  • Flexibilty
  • Diversification
  • Less risk
  • No restriction on number of shares issued
  • Can be bought/sold after NFO period

Disadvantages of open ended mutual fund schemes:

  • Subject to sudden inflows or redemption
  • Price fluctuations
  • Operating costs


  • Close ended mutual fund schemes- A close ended mutual fund scheme is the type of fund that sells a specific number of units. The Net Asset Value (NAV) of such schemes is fixed and units cannot be bought or sold after the NFO period. This implies that new investors cannot enter, while the existing ones cannot exit till the time period of the scheme gets exhausted. However, these schemes are listed on stock exchanges to maintain liquidity.

Advantages of close ended mutual fund schemes:

  • Liquidity
  • Maybe purchased at a discount to NAV

Disadvantages of close ended mutual fund schemes:

  • High volatility
  • No redemption privileges
  • Limited number of issues allowed
  • Cannot be bought/sold after NFO period


Key differences between open ended and close ended mutual fund schemes:

  • Liquidity- Open ended funds are highly liquid and can be redeemed anytime whereas close ended funds have fixed lockin periods.
  • Trading- Close ended funds are traded on a stock exchange while an open ended one isn't.
  • Net Asset Value(NAV)- Open ended schemes are bought at the existing NAV whereas close ended funds can have different NAVs from the price at which they may be purchased since they are traded at stock exchanges.


https://groww.in/blog/open-ended-vs-close-ended-schemes/


aniket

Mutual Funds serve as a collective investment avenue for investors who do not have the skill, expertise, time or risk appetite to invest in Stock Markets. Depending upon the structure, a mutual fund can be classified into the following two categories:

(a) Close ended fund

(b) Open ended fund

Close ended funds are mutual fund units that are offered to investors for a limited period only, that is, during the period of Initial Public Offer. Thereafter, any investor willing to buy or sell these units can do so through the Stock Exchange. Thus, the corpus or the total Assets under Management (AUM) to the fund house remains constant till the maturity of the fund, which is typically between 3 to 5 years. These funds are liquid as they can be bought or sold at any time on the stock exchange at prices determined by demand and supply forces, which can be at a premium or discount to Net Asset Value (NAV). These funds have the benefit of transactions being settled on real time basis.

Open ended funds are schemes that offer mutual fund units to the investors on a continuous basis. This means that the investors can buy units from, or sell units to the fund house at any time, thereby making the corpus of the fund variable. These funds also do not have a fixed maturity period. The transactions with the fund house are executed at the end of the day and settled at the applicable NAV. However, a few funds may charge an exit load on sale of mutual fund units before a specified period which will be deducted from the NAV before the investor gets his money.

Historically, open ended funds have outperformed their close ended peers. While the minimum 3-year lock in period for close ended funds provides fund managers the flexibility to steer their funds without the fear of outflows, it doesn't act favorably for return on investment. Before investing in an open ended fund, investors can see how it has performed over different market cycles. However, investing in close ended funds is synonymous to investing in the abilities of the fund manager.

The bottomline is that though open ended funds may represent a safer choice than close-ended funds, the latter may provide better return by effectively combining both dividend payments and capital appreciation. Comparing individual products within an asset class is a better strategy than comparing asset classes themselves. An investor must carefully understand what each asset class represents and then take an optimal decision apropos his requirements and risk bearing ability.

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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