Open-ended & Closed-ended Mutual Funds – The Difference
OPEN-ENDED MUTUAL FUNDS
Open-ended mutual funds are those which do not trade in the open market; they don’t have any limit as to how many units they can issue together. Because of the market fluctuations of stocks and shares and bond prices, NAV changes daily. The investments of the open-ended fund are valued at the fair-market which is also detailed under the closing market value of listed-public securities. Also, open-ended don’t have a fixed maturity period.
ADVANTAGES OF OPEN-ENDED FUNDS
- Track Record: In open-ended funds, the historical performance of the fund is available. Therefore, investing in open-ended is a well-informed decision an investor can make.
- Liquidity: These funds offer high-liquidity because you can redeem fund units as per your convenience. Also, open-ended offer the flexibility of redemption at the prevailing NAV.
- Systematic Investment Plan: Here, open-ended funds are a better option for salaried class of investors because they can initiate SIP into the fund of their own choice.
CLOSED-ENDED MUTUAL FUNDS
Closed-ended mutual funds issue the number of units (fixed) that are traded on the stock exchange, moreover like an exchange-traded fund. At first, they are launched via NFO to raise money and later traded in the open-market like a stock. However, the fund value is based on the NAV; the actual price is affected by the demand and supply as it can trade at prices below or above its real or actual value. Thus, closed-ended funds can trade at discounts or premiums to their NAVs. A fixed maturity period is what closed-ended funds are carrying.
ADVANTAGES OF CLOSED-ENDED MUTUAL FUNDS
- Availability of Market Prices: These funds are traded on stock exchanges just like equity shares, thus, providing an opportunity to the investors to buy and sell units of the fund particularly based on real time prices which can be above/below the fund’s NAV.
- Stable Asset Base: Here, the investors cannot redeem units of the fund except when the maturity of the fund expires. This way, portfolio managers get a stable asset price which is not subjected to frequent redemptions.
- Flexibility & Liquidity: Investors are free to avail flexibility and liquidity offered by the fund. The investors get the flexibility to decide on their investments by using ‘real-time information’.
DIFFERENCE BETWEEN OPEN-ENDED AND CLOSED-ENDED MUTUAL FUNDS
It is difficult to state the difference between open-ended and close-ended mutual funds. The performance of both depends on the fund management, investment style and fund category. Some investors of open-ended fund are quick to redeem their units only after NAV appreciates by 5-10% to book short term profits. This ends up hurting the investors who stay invested in the funds. In this case, closed-funds are considered as a good option because their lock-in-period prevents early redemption, thus, protecting the interest of long-term investors.
Open-ended funds turn out to be useful for those who have less or no knowledge at all, of the markets and look for an annualized return of 15-20%. As these funds are managed by experts and professionals, with the NAV being updated on a daily basis.
Well, in the end, it’s your call with the choice of the funds you need to make. Good Luck with that!
*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.