Mutual funds in India are differentiated as two types, based on their investment structure – i.e. whether they are open-ended funds or closed-ended funds. The difference between open ended vs close ended funds is a function of investment flexibility and the ease with which they can or cannot be bought or sold. While open ended funds can be bought or sold anytime, the closed ended funds can be bought only during their launch and can be redeemed when the fund investment tenure is over.
Let us discuss what are open ended and closed ended mutual funds?
What are closed ended funds?
A closed ended mutual fund scheme is where your investment is locked in for a specified period of time. You can subscribe to close ended schemes only during the new fund offer period (NFO) and redeem the units only after the lock in period or the tenure of the scheme is over.
However, some closed ended funds become open ended after the completion of the lock in period or sometime AMCs might transfer the proceeds of closed ended funds post the maturity period to another open ended fund. But to do this, consent of the investors of the said closed ended fund is needed. While comparing open ended and closed ended funds, some investment experts argue that the lock in period of closed ended fund ensures that the assets of the fund remain stable due to the specified lock-in which gives the fund manager flexibility to create a portfolio with a long term growth potential, without fearing outflows through redemption like in an open ended fund.
What are open ended funds?
Open ended funds are always open to investment and redemptions, hence, the name open ended funds. Open ended funds are the most common form of investment in mutual funds in India. These funds do not have any lock-in period or maturities; therefore, it is open perennially. Generally open ended funds do not have any maximum limit (of AUM) upto which it can collect investments from public. In open ended funds, the NAV is calculated daily on the value of the underlying securities at the end of the day. These funds are usually not traded on stock exchanges. The big difference between open ended and closed ended mutual funds is that open-ended funds always offer high liquidity compared to close ended funds where liquidity is available only after the specified lock-in period or at the fund maturity.
Difference between open ended & close ended fund (How open ended are better than close ended)
Following are the key difference between open ended and closed ended mutual funds
| Features | Open ended funds | Close ended funds |
|---|---|---|
| Liquidity | High liquidity – you can buy or sell units at any time excepting the units of ELSS funds as they are locked-in for 3 years from the date of investment. This is the biggest advantage if you compare open ended funds vs close ended | No liquidity during the lock-in period. Redemption proceeds received only after the mandatory lock-in period is over |
| Ways of investing | You can invest in lump sum as well as through SIPs. In fact, you can make any number of purchases in the fund | You can invest only during the new fund offer (NFO). You cannot invest through SIPs |
| Track record | You can invest in open ended funds by checking the track record of the schemes performances in which you want to invest | Since you can buy close ended funds only during their NFO period, no track record is available |
| Small investment Amount | You can start investing with as low as Rs 500 or Rs 1,000 | Generally, Rs 5,000 is the minimum investment amount for investing in a close ended fund NFO |
| Rupee cost averaging | Through SIPs you can take benefit of rupee cost averaging of the unit price. In case of lump sum also, you can invest based on markets level. You can add more units when the markets are down | No averaging facility in these funds as they do not accept any investments post the NFO period is over |
Conclusion
People often ask which is better open ended or closed ended mutual funds, however, we believe that an open ended fund is a much better option as it allows you to invest anytime you wish based on the surpluses you have in hand and that they are highly liquid as they can be redeemed anytime. Open ended funds are also better option as you can start investments with small amount and can also invest through SIPs for the long term for meeting your financial goals. These are the key differences between open ended vs close ended funds which gives open ended mutual funds an edge over closed ended mutual funds.
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