Hello Readers!
How are you all? Mutual funds are classified on the basis of various parameters like the nature of the investment, risk profile and investment strategies, and based on their structure, a mutual fund is differentiated in two parts, open-ended and closed-ended. Based on this parameter, fund differs from each other on the flexibility of sale and purchase of fund units.
At the time, people plan their investment in mutual funds, they do get confused about what to choose between Open-ended Mutual Funds and Close-ended Mutual Funds. Well. If you are also confused, then relax, today we are going to discuss, what are these Open-ended Mutual Funds and Close-ended Mutual Funds, what are the differences between them, and which fund should be preferred for one’s investment.
What are Open-Ended Mutual Funds?
Open-ended Mutual Funds are those funds that can be bought or sold on a daily basis, at their Net Asset Value (NAV) and thus its investors are free to enter or exit the fund as per their convenience. The NAV of these funds changes on a daily basis, and this fund can be purchased even after its initial offering period or New Fund Offer (NFO) closes.
Investors, before investing in open-ended mutual funds, can get every detail related to the fund, also they can check the fund’s historic performance under different market cycles. Investors can invest in open-ended mutual funds, via the SIP (Systematic Investment Plan) method.
Well, an open-ended mutual fund does have disadvantages too, some of which I am listing here:
- They are more exposed to market risk.
- The NAV of the funds moves according to the movements of its underlying benchmark.
- All the decisions are taken by the fund manager; thus, the investors can’t have their words, in the asset composition of open-ended funds.
What are Close-Ended Mutual Funds?
Close-ended Mutual Funds are those funds, whose have a fixed asset base and a fixed number of units, that are traded on the stock exchange. These funds NAV doesn’t change on a daily basis and hence the investors cannot buy the units of these funds after the NFO closes. These funds come with a maturity period, and thus existing investors cannot redeem or sell their funds, until the term or the maturity period of the close fund ends, however, investors who wish to redeem their funds before the maturity period, they can sell the units of the fund on the exchange when funds are traded on a stock exchange.
As the close-ended fund has a fixed asset base, it leaves the fund manager less worried about market inflows and outflows, thus they can devise new strategies to their asset allocation, in order to generate good returns. Unlike open-ended funds, closed-ended funds do not have the facility of investment via SIP (Systematic Investment Plan) because of a limited period of NFO.
Well, like open-ended mutual funds, close-ended mutual funds do have their own set of disadvantages, let us have a look at some of them:
- As there is no SIP investment option available, investors have to invest through Lump-sum at the time of the NFO.
- Investors cannot track the historic performance of close-ended mutual funds before investing in these funds.
- Also, all they have to decide is the fund house, the manager and the strategy he proposed to use for the fund.
Detailed Differences on Different Parameters
What to Prefer?
Mutual fund managers of Close-ended funds are free from the anxiety of regular or sudden redemption as these funds have a fixed asset base and they also do not worry about the fund size. However, surveys and reports say, that open-ended funds have outperformed the closed-ended funds, in almost all category funds, that is large-cap, mid-cap and small-cap mutual funds.
Also, open-ended mutual funds are preferred more over close-ended, because of mostly two reasons, that is the availability of SIP investment and providing good liquidity as compared to close-ended funds.
As of now you are aware with the open-ended and close-ended mutual funds, and you also know the differences between the two, I would suggest if you are planning to invest in mutual funds, do look at these parameters, and then analyze, which fund, open-ended or close-ended, is best for you.
Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).