Difference Between Open-ended vs Closed-ended Mutual Funds

Open-ended and closed-ended funds are two different kinds of mutual fund investment tools, each with distinct characteristics. The open-ended mutual fund allows purchasing or selling units at the NAV on any business day, making it more flexible and liquid.

In contrast, closed-ended funds have a fixed number of units, and investors can only buy or sell them on the stock exchange after the IPO or NFO. This article will help the investor decide based on the investment objectives, liquidity requirements, and risk profile. Read on to demystify the differences between them.

Open-end funds are collective investment schemes that permit investors to buy or redeem units directly from the fund at any time. These mutual funds allow investors to buy or sell units at any time based on the prevailing Net Asset Value (NAV). The AUM of these funds can sometimes differ from one another as unit holders keep buying and redeeming units.

The Asset Management Company (AMC) has managed the open-ended funds. There is flexibility in entry or exit without restricting lots or the maximum number of units available.

Close-ended funds are another type of investment scheme. In this, fixed numbers of shares are issued only through the New Fund Offer (NFO). The shares are then listed on a stock exchange and traded like stocks. Investors buy and sell closeable fund shares in the secondary market. However, the fund does not issue new shares and does not buy shares from the market.

The market price of close-ended fund shares can vary. Sometimes, it can trade at a premium or discount to the fund's Net Asset Value (NAV), depending on the market demand and supply. Close-ended funds are usually suitable for investors who can hold an investment for a given period and seek slightly higher returns.

Open-ended mutual funds can be the best option compared to open-ended and closed-ended mutual funds. However, this depends on your choice based on your resource potential and risk appetite.

• Open-Ended Funds: The size of open-ended funds is variable since investors can buy or sell units at any time at the prevailing NAV. Thus, they are ideal for long-term investors looking for steady growth, liquidity, and flexibility.
• Closed-Ended Funds: These funds are available only during an NFO. These funds have a fixed maturity period and a constant number of units listed on stock exchanges after the IPO. They suit investors with long-term investments.
• The right fund choice: One can opt for an open-ended fund for liquidity and flexibility, but closed-ended funds are preferable for a structured and long-term investment. Also, risk tolerance and the financial goal to minimise market risk.

Closed-ended and open-ended mutual funds are different products that have respective advantages. Both serve different requirements and are geared toward different classes of investors. What distinguishes them is based on various objectives in finance, risk tolerance, and favourite investments.

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