Mutual funds are classified into open-ended funds and close-ended funds depending on their investment structure. These two types of mutual funds are drastically different from one another. As an investor, you need to be aware of what they are and how they differ from each other. This will help you make a more informed investment decision. In this article, we’re going to take a look at both of these funds individually before comparing open-ended vs close-ended mutual funds. Let’s begin.
What are Open-Ended Mutual Funds?
As the name itself signifies, open-ended mutual funds have no maturity period or tenure and are permanently open. The units of the mutual fund are available for subscription throughout the year. Another major highlight of such funds is that there’s also no fixed limit on the number of units or the fund size. New units are created each time an individual invests in the fund.
Furthermore, with open-ended mutual funds, the value of each unit (the Net Asset Value) is calculated at the end of every trading day. The Net Asset Value of a mutual fund unit changes based on the market forces of demand and supply.
Since an open-ended mutual fund is not listed on a stock exchange, its units cannot be traded between investors like stocks. Any purchase or sale of mutual fund units is routed through the fund house directly. For instance, when individuals invest in an open-ended fund, they purchase the units from the fund house directly and sell them back to the fund house when they wish to liquidate their investment.
What are Close-Ended Mutual Funds?
Before we take a look at the comparison between open-end vs closed-end funds, let’s quickly try to understand close-ended mutual funds.
Close-ended mutual funds remain open for subscription only for a limited period from the time of launch (New Fund Offer). Individuals interested in subscribing to the units of such funds should apply within the subscription period. This is very similar to the Initial Public Offering (IPO) of a stock.
Close-ended mutual funds generally have a lock-in period. Investors who have subscribed to the units of the funds can opt for redemption only after the expiry of the specified lock-in period. Some close-ended funds automatically get converted into open-ended funds after the expiry of the lock-in period, giving investors an easy way out.
Open-Ended vs Close-Ended Mutual Funds: The Differences
Now that you’ve gotten a good look at both these types of mutual funds, let’s compare open-end vs closed-end funds with each other to see how they differ.
Conclusion
As you can see, there are 6 major points of difference between open-ended vs close-ended mutual funds. Remember to take these differences into account before determining the right investment option for you. Here’s a tip that you can use. If you value liquidity, investing in open-ended funds is advisable. On the other hand, if liquidity isn’t important, you can consider investing in close-ended funds.
No matter which type of mutual fund you plan to invest in, you need to first open a demat accountin your name. Motilal Oswal offers a 2-in-1 demat and trading account for free. Simply visit the website of Motilal Oswal to apply for one and kick-start your wealth creation journey.