Mutual Funds can be categorized into Open-Ended Mutual Funds and Close-Ended Mutual Funds. But what is the difference between the two? Let’s find out.
1) What Are They?
What are Open-Ended Mutual Funds?
Open-Ended Mutual Funds are a category of investments that allow investors to buy and sell units at any time. Once the New Fund Offer ends, the fund starts accepting investments within a few days. So investors can invest in the units of the scheme as per the Scheme Information Document at any time.
What are Close-ended Mutual Funds?
The Securities and Exchange Board of India (SEBI) defines close-ended funds as mutual funds that have fixed maturity date or fixed tenure. These mutual funds are available for subscription for a specified period of time when the scheme is launched and can be redeemed at the end of the investment period.
2) How Do They Work?
Open-Ended Mutual Funds
All Mutual Funds are first floated in the market through a New Fund Offer (NFO). Usually, an NFO is open for a maximum period of 15 days. Once the NFO is made, you can begin investing in Open-Ended Mutual Funds.
When you invest in an Open-Ended Mutual Fund, you must buy or sell units at the Net Asset Value. NAV is the market value of all the securities the fund has invested in. The NAV fluctuates daily depending on the market value of the securities. There is no cap on the number of units these Mutual Funds can float, nor is there a maturity period.
Open-Ended Mutual Funds are managed by professional Fund Managers who make investment decisions based on the fund’s objectives and offer documents. You can invest in these funds through Systematic Investment Plans (SIPs), Lumpsum or Systematic Transfer Plans (STPs) as per the scheme information document.
Close-Ended Mutual Funds
A New Fund Offer (NFO) is the first-time subscription offer for a new scheme launched by the asset management companies (AMCs). It is the same for close-ended funds too. Once the NFO is launched, investors can buy units of the Mutual Fund at a specified price. Once the NFO ends, new investors cannot invest in the fund. However, the AMC may then list the Mutual Fund on a stock exchange for investors to invest in.
As an investor, you may choose to hold the investment until maturity, when the fund will be liquidated, and you will be paid the NAV. Alternatively, if you are in urgent need of funds, you can sell your units on the secondary market as per the Scheme information document Closed-ended funds provide fund managers with the flexibility to allocate funds without the fear of outflows.
3) What Are Their Advantages?
Benefits of Open-Ended Mutual Funds
If you are considering investing in Open-Ended Mutual Funds, here are the advantages you should know about:
1. Liquidity
Open-Ended Mutual Funds are liquid since you can buy and sell the units on any working day. There are no restrictions on when you can liquidate your investments.
2. Transparency
Open-Ended Mutual Funds are highly transparent with their records. You can see what securities they invest in, their past performance history, and the fund manager’s performance, among other things. This makes it easy for you to make an investment decision. However, as past performance is no guarantee of future performance, it is important to review your investments regularly and keep track..
3. Systematic Options
You can invest in Open-Ended Mutual Funds through a lump sum, SIP, or STP. These options make it convenient for you to invest in the Mutual Fund Scheme according to your financial goals.
4. Professional Management
Open-Ended Mutual Funds are managed by professional Fund Managers, making them ideal for those who cannot actively manage their own portfolio. Fund Managers make investment decisions based on the market scenario, research and Scheme offer document, saving you the trouble of monitoring the market at all times.
Benefits of Close-Ended Mutual Funds
While Open-Ended Mutual Funds provide advantages such as easy liquidity, transparency and flexibility of investments, Close-Ended Mutual Funds also have advantages.
1. Stability
Close-ended Mutual Funds are considered more stable since they cannot be liquidated once the NFO ends. This feature gives Fund Managers a stable asset base, enabling them to create proper investment strategies. Maintaining liquidity is also easy since there are no/minimum redemptions until maturity.
2. Immunity from Large Flows
Another advantage that Close-ended Mutual Funds enjoy is that there are no significant deviations in the fund’s value because there are no inflows or outflows during the lock-in period. Put this in positive light – that FM can hold on to their investment strategies coz of min redemption pressure.
3. Professionally Managed
Close-ended Mutual Funds are also managed by professional Fund Managers. Given the lock-in period, Fund Managers can devise investment strategies that enhance the fund’s performance instead of being caught up with managing liquidity. Difference between the topic and the explanation.
How to Choose Between Open-Ended and Close-Ended Mutual Funds?
When choosing between open-ended and close-ended mutual funds, you need to consider several factors:
1. Liquidity
Open-ended mutual funds are more liquid because you can buy and sell units any time you wish. Close-ended mutual funds can be sold on an exchange but may not have as much liquidity as open-ended mutual funds.
2. Fees
Open-ended mutual funds may be priced higher and have higher fees. Close-ended mutual funds typically have lower fees. If this is a factor for you, be sure to compare the fees before investing.
3. Investment Horizon
The investment horizon for open-ended mutual funds is entirely up to the investor's preference and financial goals. Close-ended mutual funds may be suitable for investors who have specific goals and can sell them in the short term.
4. Flexibility
You can invest in open-ended mutual funds through a lump sum investment or through an SIP. However, since close-ended mutual funds have a limited investment window, you cannot invest in them through SIPs. Only lumpsum investments are allowed.
Therefore, if you want more flexibility of investment, higher liquidity then open-ended mutual funds may be a better option for you. As always, ensure that you have done your research, understood your investment objectives and risk profile before you invest in any mutual fund. Check the scheme’s risk-o-meter, which tells you how risky a mutual fund investment is compared to other schemes in the market. It would also be helpful to check the benchmark risk-o-meter and compare it with the investment you are considering. This will help you make a more informed decision.
Regardless of whether you invest in open-ended or close-ended mutual funds, ensure that you read all the scheme-related offer documents. Consult your financial advisor in case you want any clarifications.
Disclaimer
The information disseminated on AMFI website about various categories of mutual fund schemes is for informational purposes for creating awareness about mutual funds as a financial product category and not for sales promotion nor solicitation of business.
The content herein has been prepared by AMFI on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, AMFI cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
The content herein does not take into account individual investor’s objectives, risk appetite or financial needs or circumstances or the suitability of the mutual fund products described herein. Hence, investors are advised to consult their professional investment adviser/ consultant/ tax advisor for investment advice in this regard.
A mutual fund scheme is NOT a DEPOSIT product and is not an obligation of, or guaranteed, or insured by the mutual fund or its AMC. Due to the nature of the underlying investments, the returns or the potential returns of a mutual fund product cannot be guaranteed. Historical performance, when presented, is purely for reference purposes and is not a guarantee of future results.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
