How is close-ended fund different from an open-ended fund?
AskedA close ended mutual fund scheme, also known as closed end investment, 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 New Fund Offer (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:
Disadvantages of close ended mutual fund schemes:
Key differences between open ended and close ended mutual fund schemes:
A closed-ended fund is a type of pooled investment managed by a portfolio manager. These funds are traded as stocks in the public market.
Few key points for close ended funds are:
· Closed-ended funds allow an investor to invest only during the start and withdraw only after maturity.
· Closed-ended funds have a fixed maturity period, implying that an investor cannot buy or sell units before maturity period in general.
· Closed-ended funds are to be bought at a particular time in the market when a company provides a New Fund Offer (NFO) which is similar to IPO in shares market. Once the NFO expires, no investor is allowed to change the number of units bought unless he/she has some other person as his/her replacement to buy units that he/she wants to sell.
· Just like open ended fund, this fund also charges an expense ratio from its investors.
Suppose a company has offered its closed-ended fund of 20 units in the market in NFO. Now there are five investors and each one of them bought 4 units from the portfolio. Now once the NFO is closed, one of the investors (say named A) wants to sell 2 units as he/she wants to keep only 2 units. Now in such situation, new investor, if available, has to enter the market through stock exchange and buy those 2 units available in the portfolio. Until the investor A does not find any other investor to buy those 2 units, he/she cannot sell it until the fixed maturity period. This is how closed-ended funds work.
In terms of safety, open-ended funds are safer than closed-ended because one can put or withdraw money at any point in time, while in closed-ended funds, his/her investment has a lock in period in the form of fixed maturity. Investors who do not have liquidity issues can definitely opt for these funds. However, open-ended funds are riskier than closed-ended funds because one can enter and exit at any time hence it becomes difficult for the fund manager to manage the portfolio. These funds are less risky and the fund manager exactly knows how much amount will be lying with him at a particular point of time. After reading this, an investor opting to invest in a close ended fund can take a decision.
A closed-ended fund is also a type of pooled investment managed by a portfolio manager. However it is different from the type of funds which derive their values from NAV, because closed-ended funds are traded as stocks in the public market.
Let us understand them by striking a line of difference between open-ended and closed-ended funds.
In open-ended funds, you can invest and withdraw money any time. However, closed-ended funds allow you to invest only during the start and withdraw only after maturity.
You can buy and sell units of open-ended funds at any point in time and any number of units can be bought. The units are bought and sold at the Net Asset Value (NAV) which is decided at the end of every day based on the values of assets held by the fund.
There is no fixed maturity period for open-ended funds, however closed-ended funds as the name suggests come with a fixed maturity period, implying that you cannot buy or sell units before maturity period in general.
Closed-ended funds are to be bought at a particular time in the market when a company provides a New Fund Offer (NFO) which is similar to IPO in shares market. Once the NFO expires, no investor is allowed to change the number of units bought unless he/she has some other person as his/her replacement to buy units that he/she wants to sell.
Closed-ended funds deal with stocks and bonds. Let us try to comprehend the concept with the help of an example:
Suppose a company has offered its closed-ended fund of 20 units in the market in NFO. Now there are five investors and each one of them bought 4 units from the portfolio. Now once the NFO is closed, one of the investors (say named A) wants to sell 2 units as he/she wants to keep only 2 units. Now in such situation, new investor, if available, has to enter the market through stock exchange and buy those 2 units available in the portfolio. Until the investor A does not find any other investor to buy those 2 units, he/she cannot sell it until the fixed maturity period. This is how closed-ended funds work.
So as compared to open-ended funds, you have fixed maturity period for closed-ended funds, there is fixed time for entry and exit into the market, and the fixed number of units can be bought or sold within the fixed time period. Open-ended funds have NAV as their price while closed-ended funds have market price as their actual price. However both the funds charge an annual expense ratio to the investor.
In terms of safety, open-ended funds are safer than closed-ended because you can put or withdraw money at any point in time, while in closed-ended funds, your investment has a locking-period in the form of fixed maturity. However, open-ended funds are riskier than closed-ended funds because one can enter and exit at any time hence it becomes difficult for the fund manager to manage the portfolio.
I hope this answers your question!