Mutual funds in India are professionally categorized into two types: Open ended and closed ended. The basic characteristics of both funds are common. However, the investor has to understand the key differences between these two funds before investing.
The open ended funds are flexible to purchase and sell at any time whereas the closed ended funds have a new fund offer period (NFO). The investors of both resources can invest to a larger extent based on their financial position.
In this article, let’s explain in detail the major differences between open ended and closed ended mutual funds. Hope, it helps you to begin with the best.
What is Open Ended Mutual Funds?
Open ended mutual funds are most commonly known. This type has no tenure or maturity period and is free from limitations on transferring the shares. It doesn’t have any fixed maturity period so it is available to purchase and sell throughout the year. New units are created during every individual investment.
Based on every trading day, the value of each unit is calculated. However, the Net Asset Value of a unit changes according to the demand and supply of the market.
Open ended funds are not available at the stock exchange. Since the units couldn’t be traded like stocks between the investors. For instance: the individuals in open ended funds are open to purchase and sell the units directly at the fund house.
What Are Closed Ended Mutual Funds?
Unlike open ended, the closed ended mutual funds are open for subscription only for a certain limited period of time. Interested individuals should be aware of the time of launch and subscribe to the units within the estimated time limit. This kind of fund is similar to an IPO (Initial Public Stocking).
Closed ended funds come up with a lock-in period as the investors can opt for redemption only after the expiry date. In some cases, the closed ended funds have the possibility of getting converted into open ended mutual funds once after the expiry time of the tenure period.
Difference Between Open Ended and Closed Ended Mutual Funds
| Comparison Parameters | Open Ended Mutual Funds | Closed Ended Mutual Funds |
|---|---|---|
| Track Record | Investors can track the record of scheme performance and make their investments. | Since you are open to buying closed ended funds at the time of launch during the NFO period |
| Maturity Period | Open ended fund has no fixed maturity period | The fixed maturity time may be between 3 to 5 years. |
| Price Determination | Price is determined based on Net Asset Value | Based on the demand and supply of the market. |
| Minimum Investment Limit | You can start your investment at Rs. 500 | Most commonly, the investment starts at Rs. 5000 |
| Liquidity | High liquidity since the investors can purchase and sell the units directly at the fund house without any restrictions | No liquidity, close ended fund has a tenure period as it can be redeemed after the expiry time limit. |
| Investment Ways | It supports both the SPIs (Systematic Investment Plans) and lump-sum investments. | You can invest only during the offer period in a lump sum only. |
| Fund Size | Open ended funds are flexible | It is fixed with a tenure period |
Bottomline
Hopefully, you may have got to know the major differences between open ended funds and closed ended funds. It is essential to remember these key points when you decide to make your investment in mutual funds.
Before determining the fund type, understand which will benefit you more. Here’s a tip if you consider liquidity is not more important then go with close ended mutual funds. If you value it, an open ended fund is your ideal choice.