You can choose from hundreds of mutual fund schemes. Each is unique, has a specific goal and risk, and is suitable
for different investors. Despite their differences, each mutual fund scheme falls under one of the two
categories—open-ended or close-ended mutual funds.
Simply put, open-ended mutual funds can be bought or sold anytime, while a close-ended mutual fund can just be purchased when the mutual fund is launched and liquidated when the maturity period for investment ends. Continue reading to learn more about open and close-ended mutual funds.
What is an open-ended mutual fund?
An open-ended mutual fund is a category with a zero-time barrier for entry or exit. The Net Asset Value (NAV) determines the units bought or sold in such funds. NAV continues to change daily as per the changes in prices of stocks and bonds. In such funds, no maturity time is predetermined; however, you have to pay the exit load as applicable to the scheme.
What is a close-ended fund?
A close-ended mutual fund is a debt fund constituting a pool of assets issued on predetermined units during its introduction. Such offers are addressed as New Fund Offers (NFO), and you cannot purchase or sell the units after their closure.
Funds are tradeable; however, they have a fixed maturity period and can be liquidated after they are attained. Like stocks, you might be able to trade close-ended funds in secondary markets.
Close-ended vs open-ended funds
Read on to learn the difference between open-ended and close-ended mutual funds.
An open-ended mutual fund is highly liquid, which means you can sell or purchase units of any fund at any time. The only exception in open-ended funds is Equity Linked Savings Scheme (ELSS). In an ELSS fund, your investment is locked in for three years from the investment date.
On the contrary, close-ended mutual funds do not allow you to redeem the units until the maturity date. You can redeem the proceeds in the case of close-ended mutual funds once the maturity period is over.
2. Systematic investment facility
Close-ended mutual funds require a lump sum investment during their launch. It is comparatively a riskier option and better suited for experienced investors aware of the market's nitty-gritty and capable of handling market volatility if the business cycle works against investment philosophy.
On the contrary, you can invest in open-ended mutual funds through the lumpsum or SIP (Systematic Investment Plan) route. In the case of SIP, the investment amount starts from as low as Rs 500.
New investors might be caught between open-ended and close-ended mutual funds. The choice between the two types of mutual funds depends on your investment goals, risk appetite, and market knowledge. Both types of mutual fund schemes have their benefits, with open-ended funds providing more insight into the fund's performance and changes than close-ended funds.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
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