Open-Ended vs. Closed-Ended Mutual Funds: A Simple Guide
Mutual funds in India are broadly categorized into two types: open-ended and closed-ended funds. These categories are based on how flexible the investment is and how easily the fund can be bought or sold.
In open-ended funds, you can invest and redeem your money anytime. On the other hand, closed-ended funds can only be purchased during a specific launch period, and the investment can be redeemed only after a set period.
Let’s dive into the details of each type.
What are Closed-Ended Funds?
Closed-ended mutual funds are investments with a fixed lock-in period. You can only buy these funds during the New Fund Offer (NFO) period. After this, you can redeem the investment only when the lock-in period or the scheme’s tenure ends.
Sometimes, closed-ended funds may turn into open-ended ones after the lock-in period. In some cases, the Asset Management Company (AMC) might transfer your closed-ended fund proceeds to an open-ended fund. However, this requires the consent of investors.
Advantages:
The lock-in period ensures that the fund’s assets remain stable, giving the fund manager more flexibility to focus on long-term growth. Unlike open-ended funds, the manager doesn’t have to worry about sudden redemptions that might disrupt the portfolio.
What are Open-Ended Funds?
Open-ended funds allow investors to buy or redeem units at any time. They do not have any lock-in period or a fixed maturity date, meaning they are always open to new investments.
The Net Asset Value (NAV) of open-ended funds is calculated daily, based on the value of the underlying securities at the end of the day. These funds offer more liquidity compared to closed-ended funds and are generally not traded on stock exchanges.
Advantages:
Open-ended funds provide high liquidity, meaning you can access your money whenever you need it. They also allow investments through SIPs (Systematic Investment Plans), making it easier for investors to invest small amounts regularly.
Key Differences Between Open-Ended and Closed-Ended Mutual Funds:
Here is the critical difference between Open-ended vs Close-ended Mutual Fund Schemes-
Conclusion: Which is Better?
Many investors wonder whether open-ended or closed-ended mutual funds are better. Open-ended funds tend to be a better choice for most people because they offer:
- Flexibility to invest any time
- High liquidity, allowing you to redeem anytime
- The ability to start with small amounts through SIPs
These features make open-ended funds ideal for meeting long-term financial goals.
Note: This content is for educational purposes only and not intended as financial advice or product recommendations.
