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What Are Open-Ended And Close-Ended Mutual Funds? A Beginner's Guide Arrow Image

What Are Open-Ended And Close-Ended Mutual Funds? A Beginner's Guide


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What are open-ended funds?

Open-ended funds are Mutual funds, whether equity or debt funds , allow investors to subscribe to and redeem units continuously throughout the year on business days. These are perpetual schemes that lack a fixed maturity date thus, making them highly liquid in nature.

Investors can conveniently buy or sell units at the Net Asset Value (NAV), which is declared daily. Additionally, there are no restrictions on the number of units the fund can issue, and the NAV reflects the performance of the underlying securities.

How Open-ended mutual funds work?

Following the New Fund Offer (NFO) period, the mutual fund company typically takes around five days to allocate units to investors and launch the fund in the market. Subsequently, investors can invest in or redeem units based on the prevailing Net Asset Value (NAV) of the fund. Usually, an NFO is open for a maximum period of 15 days.

These funds accept investments continuously, even after the New Fund Offer (NFO) period ends. Investors can buy or sell units at the Asset Value (NAV) Net , which fluctuates daily based on the fund’s holdings. There’s no cap on the number of units, and no maturity period. Professional fund managers make investment decisions, and you can invest through SIPs, Lumpsum, or STPs.

What are the advantages of open-ended fund?

  • Liquidity: Investors can buy or redeem their mutual fund units of open-ended funds flexibly on any business working day without any restrictions. This feature allows investors to access to their money when required. Open-Ended Mutual Funds offer high liquidity because investors can purchase and redeem units on any business day without any specific limitations on when they can liquidate their investments.
  • Highly transparent Open-ended mutual funds offer high level of transparency of their records. Investors can see which stocks are held in the portfolio, their past performance history, and the fund manager’s performance, among other things. This makes it easy for an investor to make an investment decision. However, as past performance is no guarantee of future performance, it is important to review the investments regularly and keep track.
  • Array of options available It is possible to invest in Open-Ended Mutual Funds through a lump sum, systematic investment plans, or systematic transfer plans in a wide variety of schemes (Equity or debt). These options make it convenient for you to invest in the Mutual Fund Scheme according to the investor’s financial goals.
  • Professional Management Open-ended mutual funds are managed by professionals called fund managers who make investment decisions based on thorough research. Thus, making them ideal for those who cannot actively manage their own portfolio. Fund Managers make investment decisions based on the market scenario, research and scheme offer document, preventing the investor from the hassle of always monitoring the market.

What are close-ended funds?

Close ended funds are mutual funds that allow investors to invest during the time when the fund is launched, i.e. new fund offer period, after that investors are not allowed to invest in it. Even the redemption is not possible before the end of the investment period.

Difference between open-ended and closed-ended funds?

Here are the differences between the two:

Open-ended Close-ended
Can invest lumpsum or via SIP even after NFO period after NFO period Can invest lumpsum only during the NFO period
Offers high liquidity Liquidation possible only at the time of maturity
Asset base keeps changing Asset base remains fixed
No lock-in period Has a lock-in period
Fund size is flexible Fund size is fixed
The units of these schemes are not listed and cannot be traded on stock exchanges. The fund units can be listed and traded on stock exchanges.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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