Open Ended Fund vs Close Ended Fund

Are you tired of analysing when the right time to enter the stock market is? Mutual funds are the best investment option for you. Since professionals manage your funds, it eliminates the need for you to do any guesswork. So, you can sit back and watch your money grow. 

But before you go ahead and type buy mutual funds online on your web browser, you must understand the different categories of funds available for you to invest in. Based on their structures, there are two types of funds:

- Open-ended mutual funds 

- Closed-ended mutual funds

Let us explore how these two categories of funds work. We will also list the pros and cons to help you understand their differences.

What are open-ended mutual funds?

Open-ended funds are perennially open for investment and redemptions. Generally, investors refer to open-ended funds when talking about mutual funds. These funds do not have any maturity period or have any maximum limit on investments they can collect from the public. You can purchase and trade open-ended funds even after the New Fund Offer (NFO) period. Equity-linked savings schemes (ELSS) mutual funds and flexi-cap funds are examples of open-ended funds. 

Note that ELSS mutual funds have a lock-in period of three years which you cannot redeem your investment. However, they are open-ended funds because, after three years, you can keep your investment for an extended period and withdraw whenever you need funds.

The Net Asset Value (NAV) of open-ended funds fluctuates daily depending on the prices of market securities. You can invest in open-ended funds through SIPs and systematic withdrawal plans (SWPs).

What are closed-ended mutual funds?

Unlike open-ended funds, closed-end mutual funds are equity or debt mutual funds that do not provide trade flexibility in terms of maturity, number of units, and redemption. You can only purchase units of these funds during the NFO period, and they trade in the open market like stocks. Fund houses issue a fixed number of units to investors with a predetermined maturity period, and you cannot redeem your investment before maturity.

Debt mutual funds can have a maturity period as low as one day. They are closed-ended funds because you can only redeem them when they mature after a day.

No new investment is allowed once the NFO period ends, and the fund house lists them on the stock exchange. The NAV of closed-ended funds determines their price, but their trade price fluctuates based on supply and demand. At maturity, investors receive their capital at the NAV rate of that day.

Difference between open-open-ended fund and closed-fund

Which fund is best for you?

Whether you should invest in closed-ended or open-ended funds depends on these three factors:

- Financial situation: Do you have funds for investing, and can you bear market risks?

- Financial goal: What do you want to achieve? Save for retirement, an additional income source, or maybe diversify your portfolio.

- Financial literacy: Can you predict your investment's market trends and profitability?

So, if you have a large sum of money lying idle, you can invest it in a close-ended debt mutual fund. You can park your money in any closed-end fund, let it grow and withdraw it at maturity.

Debt mutual funds such as treasury bills, bonds, commercial papers, etc., are ideal for growing your wealth without bearing serious market risk.

In case you are a salaried professional with limited savings. Open-ended funds are a better option for you. You can invest in flexi-cap funds or equity-linked savings schemes through a starting SIP at Rs 500. 

Additionally, if you invest in ELSS mutual funds, you can save up to Rs. 46,800/year in taxes. However, if you want to build a diverse portfolio, can bear the moderate risk and are ok with paying capital gains tax, flexi-cap funds are the best open-ended fund for you.

In conclusion

Now that you understand what closed-ended and open-ended mutual funds offer, you can start making intelligent investment decisions. Since professionals manage both types of funds, you do not have to worry about assessing the market and investing independently. You can even buy these mutual funds online from investment platforms like Tata Capital's Moneyfy app and website.

Moneyfy allows you to invest in a wide range of mutual funds right from your smartphone. Register on the app, complete a simple 3-step KYC process, and select suitable MF schemes through goal-based investment tools. Download today!

FAQs for open-ended and close-ended mutual funds

1. What are the different types of closed-ended mutual funds?

Different types of close-ended mutual funds include real estate funds, bond funds, and commodity funds, among others.

2. Can open-ended funds be redeemed?

Yes, you can redeem units of open-ended mutual funds at any time directly from the fund house or through trading on exchanges.

3. Which funds are open-ended?

Open-ended funds include various categories such as large and mid-cap funds, hedge funds, ETFs, and more, catering to different risk appetites and investment goals.

4. Is SIP open-ended?

Yes, SIPs are typically open-ended, allowing investors to invest fixed amounts at regular intervals.

5. Why are closed-end funds better?

Closed-end funds can be better as they offer stable management and potential discounts to NAV and are unaffected by investor redemptions due to fixed maturity.

6. Can we sell a closed-ended mutual fund?

Yes, you can sell units of closed-ended mutual funds on stock exchanges during the trading window.