Mutual funds are a popular investment choice for many Indians, offering a way to grow wealth through diversification. However, understanding the difference between open-ended and close-ended mutual funds is crucial for making informed decisions.
This blog will explain these two types of funds in simple terms, helping you choose the right one for your financial goals.
What is an Open-Ended Mutual Fund?
An open-ended mutual fund is where many people put their money to invest together. Here’s how it works: you buy units of the fund, and the money you put in is used to purchase different types of investments, like stocks or bonds.
The unique thing about open-ended funds is that you can buy or sell these units anytime. This flexibility means you can quickly get your money back whenever needed.
Plus, since the fund is always open for new investments and redemptions, it stays flexible and can adapt to market changes. Open-ended mutual funds could be a good choice if you’re looking for a simple and flexible investment method.
Open-ended mutual funds offer significant benefits: They provide flexibility, allowing you to buy or sell units anytime and giving you control over your investments. They also offer liquidity, so you can easily withdraw your money whenever needed.
Additionally, these funds are always open for new investments and redemptions, ensuring continuous accessibility for investors.
What is a Close-Ended Mutual Fund?
A close-ended mutual fund is an investment where you buy shares during a specific period. When you purchase units of a close-ended fund, you’re investing in a set amount of money that’s already been decided.
Unlike open-ended funds, you can’t keep adding more or take them out whenever you want. Instead, these funds have a specific period. During this time, you can buy or sell fund units on the stock exchange, like buying or selling company shares.
Close-ended mutual funds offer several benefits: they have a fixed amount of money, which helps the fund manager plan investments better; their units can be traded on stock exchanges, providing liquidity and the chance to trade at market prices.
Additionally, their fixed capital allows fund managers to focus on long-term investments, potentially leading to higher returns than open-ended funds.
Differences Between Open-Ended and Close-Ended Mutual Funds
Open-ended funds let you buy and sell units anytime, offering flexibility and liquidity. Close-ended funds have fixed capital and are traded on stock exchanges, offering higher returns but less flexibility.
The table below highlights these key differences to help you choose the right fund.
| Aspect | Open-Ended Funds | Close-ended Funds |
| Liquidity | High, can be bought/sold any time at NAV | Limited, traded on stock exchanges |
| Capital | Variable: it changes with investments | Fixed: there are no new units post-initial offer |
| NAV vs Market Price | Priced at NAV | Traded at market price |
Choosing the Right Mutual Fund for You
Choosing between open-ended and close-ended mutual funds depends on your investment goals and needs. Here are some factors to consider:
Open-ended funds are better if you need easy access to your money because you can buy and sell units anytime. Close-ended funds have fixed capital and can only be traded on stock exchanges, making them less flexible.
Open-ended funds are suitable for both short-term and long-term investments. If you’re looking for a long-term investment and can handle less liquidity, close-ended funds might be a good choice, as they often focus on long-term growth.
Consider your risk tolerance. Open-ended funds provide more flexibility and lower risk since you can withdraw your investment anytime. Close-ended funds can offer higher returns but come with higher risk due to market price fluctuations.
Example Scenarios:
- Scenario 1: Priya wants to save for her child’s education, which is ten years away. She chooses a close-ended mutual fund because she is willing to wait for higher returns and doesn’t need immediate access to the funds.
- Scenario 2: Raj must build an emergency fund that he can access anytime. He opts for an open-ended mutual fund for its liquidity and flexibility, allowing him to withdraw money whenever needed.
How to Recognize Open-Ended and Close-Ended Mutual Funds
Identifying whether a mutual fund is open-ended or close-ended is simple if you know what to look for. Here are some easy tips:
Check the Fund’s Name
Open-ended funds often include “Open-Ended” in their names, while close-ended funds might have “Close-End” or “Fixed-Term.”
Offering Period
Open-ended funds allow you to buy and sell units anytime. Close-ended funds have a specific period when you can buy units, usually at the beginning, after which no new units are issued.
Trading
Open-ended fund units can be bought or sold directly through the fund company based on the Net Asset Value (NAV). Close-ended fund units are traded on stock exchanges like shares, meaning you buy and sell them at market prices.
By checking the fund’s name, knowing its offering period, and understanding how it’s traded, you can easily recognise if a mutual fund is open-ended or close-ended.
Conclusion
Open and close-ended mutual funds offer unique benefits and can fit different investment goals. Understanding the differences between them can help you make better financial decisions. Whether you prioritise liquidity or long-term growth, the right mutual fund can impact your investment journey.
FAQs
1. Can I switch from a close-ended to an open-ended mutual fund?
Ans: No, you cannot directly switch. You need to redeem your units of the close-ended fund and then invest in an open-ended fund.
2. Are close-ended funds riskier than open-ended funds?
Ans: Close-ended funds can be riskier due to limited liquidity and market price variations. The risk level also depends on the fund’s strategy and assets.
3. Is ELSS open-ended or closed-ended?
Ans: Equity Linked Savings Scheme (ELSS) is an open-ended mutual fund. This means you can invest in ELSS funds anytime and redeem your units whenever you want after the mandatory three-year lock-in period.
4. Do open-ended funds always have lower returns than close-ended funds?
Ans: Not necessarily. Like close-ended funds, returns depend on the fund manager’s strategy and market conditions.
5. Can I exit an open-ended mutual fund anytime?
Ans: Based on the current NAV, you can redeem your units in an open-ended mutual fund anytime.
