Difference between Open Ended and Close Ended Mutual Funds

Explore the variances between open-ended and close-ended mutual funds to make informed investment decisions.
Open Ended and Close Ended Mutual Funds
3 min
18 March 2024

The choice between open-ended and close-ended funds can be quite difficult if you are new to mutual fund investing. To make a smart choice between these two categories, you need to understand how they work and how they are different. In this article, we will explore these aspects and take a closer look at open-ended vs close-ended mutual funds.

What are open-ended funds?

Open-ended mutual funds are schemes in which you can buy or sell units on any business day. In these funds, units are purchased and redeemed continuously. They do not have any fixed maturity or lock-in periods. The units are bought or sold directly through the asset management company (AMC) or mutual fund house based on the prevailing net asset value (NAV).

What are close-ended funds?

Close-ended funds are those schemes whose units are not available for purchase or sale at any time. You can only invest in these schemes during the new fund offer (NFO) period and redeem the investment after the maturity period is complete. Alternatively, you can sell the units of close-ended funds via stock exchanges at the prevailing market price if you want to exit your position and redeem your holdings.

Open-ended vs close-ended mutual fund schemes

In any close-ended vs open-ended fund comparison, it is crucial to see how the two categories are different from one another. The table below summarises the primary differences between open and close-ended funds.

Particulars

Open-ended mutual funds

Close-ended mutual funds

Meaning

These are funds that offer new units for subscription continuously

These are funds that only offer new units during the new fund offer (NFO) period

Liquidity

High liquidity

Limited liquidity

Purchase and sale of units

The purchase and sale of units can happen on any business day

The purchase happens during the new fund offer, while units can be sold on the stock exchanges or redeemed at maturity

Mode of investment

SIP or lump sum amount

A lump sum amount only

Maturity period

No specific maturity period

Predetermined maturity period

Mode of trading

Directly through the mutual fund house

Can be traded via stock exchanges

No. of unit holders

The number of unit holders varies

The number of unit holders is fixed unless units are redeemed on the stock exchange.

 

Advantages of open-ended funds

Open-ended funds offer various benefits to investors. By choosing these types of funds, you get the following advantages.

  • They are highly liquid.
  • You can purchase or redeem them at the prevailing NAV.
  • You can study the historical performance of such funds before investing in them.
  • You can invest in open-ended funds via SIPs for added benefits.
  • You can diversify your portfolio with these funds.

Disadvantages of open-ended funds

Before you choose open-ended funds, you must also be mindful of its limitations, which include the following aspects.

  • The high level of diversification may increase the market risk.
  • You are exposed to the risk of timing your entry into and exit from the markets.
  • Poor management could dilute the value of investments.

Advantages of close-ended funds

Close-ended funds also offer unique advantages to investors, some of which are outlined below.

  • The fixed capital ensures stability and reduces the cash drag on investments.
  • You can trade these funds on exchanges in the secondary market.
  • These funds may be comparatively less volatile than open-ended funds.
  • They are ideal for medium-term to long-term investments.
  • They allow you to spend more time invested in the market rather than timing the market.

Disadvantages of close-ended funds

On the downside, close-ended funds have some risks or limitations that you need to know about before you invest.

  • Liquidity may be quite limited for these funds.
  • The lock-in period may not align with your end financial goals.
  • You cannot start a Systematic Investment Plan (SIP) in these funds; you need to invest a lump sum amount.

Which one should you choose?

Now that you know the differences between open and close-ended funds as well as their pros and cons, you can make a more informed choice between the two types of schemes. Broadly, here are some guidelines to help you choose:

Open-ended funds are suitable for you if:

  • You prioritise liquidity.
  • You want the convenience of redeeming your investments based on the current NAV.
  • You want the flexibility to adjust your portfolio according to market movements.
  • You are interested in SIPs and/or SWPs

Close-ended funds may be suitable for you if:

  • You want to invest for a fixed period.
  • You do not want immediate liquidity.
  • You have a medium-term or long-term outlook.
  • You are comfortable with fixed-term and stable investments.

Conclusion

Both open-ended and close-ended funds have their advantages. To make an informed decision, compare open-ended vs close-ended mutual funds, assess the risk-reward ratio, and choose the scheme that best aligns with your financial goals and risk appetite.

Frequently asked questions

What are the different types of closed-ended mutual funds?

Depending on the type of assets they primarily invest in, close-ended funds can be equity or debt funds. Within these categories, there are various subcategories for the types of equity or debt instruments that make up the fund’s portfolio.

Can open-ended funds be redeemed?

Yes, you can easily redeem open-ended funds according to your convenience because they do not have a fixed maturity.

What is the meaning of ‘load’ in a mutual fund?

The load in open-ended is a kind of fee or commission that is payable when you buy or sell units in the fund. There is generally no load on closed ended schemes.