5 MinsNov 03, 2022
If you are looking to generate wealth, mutual funds are a must-have in your portfolio. When you invest in a mutual fund, your money is invested in diverse asset classes such as equity shares, government bonds, corporate bonds, short-term money market instruments, commodities, etc., depending on the scheme you choose to invest in.
Mutual funds are classified based on the asset class they invest in as well as how they invest. For instance, some categories of mutual funds based on underlying assets are equity, debt, hybrid, solution-oriented, and so on. Based on how they invest, funds can be classified as open-ended or close-ended. This is stated right at the launch of the scheme. Let us understand the difference between these two categories of mutual funds in detail.
Open-ended Mutual Funds
As the name suggests, you can invest in open-ended funds even after their NFO (New Fund Offer) period. So, as an investor, you can enter (invest) and exit (redeem) the fund at any time. But note that though open-ended mutual funds do not trade
in the open market, there is sufficient liquidity and flexibility.
Along with making lump sum investments, you can invest via Systematic Investment Plans (SIPs). This allows you to invest a small amount every month or quarterly.
The performance of open-ended mutual funds is reflected in their NAV, which changes daily and you can easily track the performance.
Close-ended Mutual Funds
These mutual funds are available for subscription only during a specified period, i.e., when they are launched as a new fund offer. Thereafter, as an investor, you can buy or sell the units of a close-ended fund only on a recognised stock exchange
through the broker, as close-ended funds are listed and traded in the open market (the secondary market).
Closed-ended funds do not allow SIPs; only lump-sum investments are permitted.
Though these funds also have a NAV, their value is derived based on the function of demand and supply. In the case of low supply and high demand, a close-ended mutual fund may trade at a premium to its NAV and vice versa.
Moreover, these funds are ‘closed-ended’ for a particular period of time, e.g., 3 years, 5 years, 10 years, etc. This gives the fund manager the flexibility to allocate the corpus freely as per the scheme’s mandate without having
to worry about redemptions. That said, if the close-ended scheme performs poorly during the lock-in period, you can’t redeem the scheme with the house. Hence, liquidity and flexibility may be an issue. The only option for you is to sell
the units on the stock exchange (the secondary market) to whosoever is willing to buy them.
After the lock-end period ends, a mutual fund house may decide to redeem, i.e., pay or transfer into the account of the investors, or to convert the respective close-ended scheme into an open-ended one.
[Also Read: Confused by the wide range of equity mutual funds?]
Here is a summary of the distinction between open-ended funds and close-ended funds.
Open-ended Funds v/s Close-ended Funds
|Points of Distinction||Open-ended Funds||Close-ended Funds|
|NAV||Determined by the performance of the underlying assets of the fund||Derived based on the function of demand and supply|
|Listed on the stock exchange||No||Yes|
|Lock-in||Some schemes may be subject to lock-in, for example, ELSS||All schemes are subject to lock-in|
|Liquidity||High – you can buy or sell units at any time from the fund house||No liquidity during the lock-in period. You may sell on the exchange, if possible.|
|SIP investment||Allowed||Disallowed (only lump sum investment)|
|Minimum Investment||As low as Rs 500/- or Rs 1000/-||Generally, Rs 5000/- for close-ended NFO|
|Transactions||Performed at day end (based on the closing NAV)||In the secondary market, transactions are performed on a real-time basis|
|Asset base||Subject to change with the entry and exit of the investors||It is fixed - the trades on the exchange do not lead to an increase or decrease in the asset base.|
|Track record||Available||Not easily available|
|Risk||Less risky than close-ended funds||Riskier than open-ended funds|
Always take into consideration your age, risk profile, broader investment objective, the financial goals you wish to achieve, and investment horizon to choose schemes that are the best fit for you. Select a mutual fund suitable for you online.
Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.