What’s the difference between open-ended and closed-ended mutual funds?

Open-ended mutual fund

The term “open ended funds” denote investments and redemptions being available at all times. Open-ended investment is a popular type of mutual fund investing in India. These funds are perpetually open because they don’t have a lock-in period or maturity. In addition, open-ended funds can accept public investments up to their total AUM limit.

Open-ended funds base their daily NAV calculations on the worth of the underlying assets at the end of the business day. In most cases, these funds are not exchanged on stock markets. As a result, open-ended mutual funds generate invaluable liquidity compared to closed-ended funds.

Advantages of open-ended funds

An open-ended mutual fund provides substantial liquidity, enabling you to redeem your units as per your choice. Besides, unlike other long-term asset classes, open-ended funds provide withdrawal at the present Net Asset Value (NAV).

Past performance data is readily available, which helps investors make an informed investment decision.

Open-ended funds work especially well for salaried people as they can invest through a Systematic Investment Plan (SIP).

Disadvantages of open-ended funds

Despite the fund owner’s best efforts to keep the portfolio diversified, open-ended funds are nonetheless susceptible to market risks—the variations in the fundamental benchmark cause changes in the fund’s NAV.

Open-ended funds designate fund managers to oversee all decisions regarding purchasing assets for the fund. Consequently, the investors have almost no influence over the fund’s asset mix.

Closed-ended mutual funds

In a closed-ended unit trusts plan, your money is locked in for a predetermined time. One can subscribe to closed-ended schemes only during the new investment offer period (NFO). Moreover, one can redeem the shares after the lock-in term, or the scheme term has passed.

After the lock-in period is through, certain closed-ended funds do, however, turn open-ended, and occasionally AMCs may move the earnings of closed-ended assets after the maturity term to another open-ended fund.

However, the investors in the closed-ended fund must agree to accomplish this. Investment analysts contend that the closed-ended fund’s lock-in period ensures that investments stay constant. The structure gives the investment manager adaptability to design a portfolio with long-term growth prospects without worrying about outflows as in an open-ended fund.

Advantages of closed-ended funds

The shareholders of closed-ended funds can only redeem their units on specific dates, such as when the fund reaches maturity. As a consequence, professional investors have a steady investment portfolio that is resistant to routine redemptions. In addition, a consistent asset basis makes it easy for the fund manager to devise a straightforward investment strategy. Fund managers might also focus on the overall goals of the fund without bothering about both inflows and outflows in the event of stable basic methods.
Equity shares and closed-ended funds trade on stock exchanges. With actual values that may be greater (premium) or lower (contract) than the fund’s NAV, investors can now purchase and sell fund units.

Investors can liquidate closed-ended funds adhering to the fund’s regulations. They could purchase and trade closed-ended investment units at commercial rates using real-time pricing available throughout the trading session.

Disadvantages of closed-ended funds

The lock-in period gave fund managers the flexibility to allocate funds. But that has not helped to boost returns.

When closed-ended funds start trading, they must be topped up with a one-time investment. However, it is not always wise to manage your money that way.

When it comes to closed-ended investments, the investor does not get to know past performance. Hence, investments in a closed-ended portfolio carry risks only the fund manager can manage.

Comparison between open-ended and closed-ended mutual funds

The chart below compares open-ended vs. closed-ended mutual funds:

At a Glance

Parameters	Open-Ended Funds	Closed-Ended Funds
	Open-ended funds are plans that continuously provide investors with additional units.	Closed-ended funds are mutual funds that only temporarily sell additional units to investors.
Subscription	These funds are accessible for enrollment all year long.	Only on the days that have been designated are these monies accessible for the subscription.
Maturity	Maturity is not even a fixed date.	Three to five years is the fixed maturity period.
Liquidity provider	Assets	Stock market
Corpus	Flexible	Fixed
Listing	The money is used directly for transactions; there is no registration on the stock exchange.	Listed for trading on a reputed stock exchange.
Transactions	Carried out at the close of the day.	Executed in real-time.
Determination of price	Divide the NAV by the number of shares outstanding to get the price.	Supply and demand play a role in pricing.
Selling price	Net Asset Value (NAV)	Discount or premium above Net Asset Value (NAV).

Which one should you choose?

Having learned quite a bit about open-ended and closed-ended mutual funds, it is up to you to decide your investment choice based on your goals.

However, experts advise novices and early investors to select open-ended plans. Besides, open-ended mutual funds offer superior liquidity since you can redeem the units whenever you choose.

Conclusion

No financial product is perfect. The choice is yours based on your risk appetite and goals. Here, both instruments discussed have their pros and cons. However, open-ended mutual funds have a slight edge as they enable you to invest whenever you like. They are highly liquid since they can be resurrected at any time.

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