Open-ended Versus Close ended mutual funds : Why Are They Majorly Different

Open Ended Mutual Fund

People who are looking to maximize their wealth often tend to invest in mutual fund rather than other vehicles of investment.

This is because some mutual fund investment do not need as much time and money as the other forms. 

They tend to be less risky than stock market trading.

You can even handover the management of fund units to a professional and forget about it until the day of maturity.

Mutual funds have become a widely used investment option for the people in the country.

What is a mutual fund?

Mutual Fund is an investment vehicle used by investors to pool money from many stocks.

People invest in mutual fund via fund managers who allocate this money from not just one company but several company shares. 

They use invested amount to buy different types of securities. The returns earned are distributed among investors based on the funded amount. 

A person has two options when it comes to mutual fund. He/ she can either go for open-ended fund or close end fund.

Also Read: A  Comparative Analysis of Liquid Fund and FD

What is an open-ended fund?

Open-ended fund is a flexible tool of investment. 

An investor can buy or sell the units of funds at any time. These trades are made based on the net value asset. 

The NAV is analysed daily thus, people receive different returns on trades every day. 

Open-ended funds have no limit on the issue of fund units. They do not have any maturity period as well. This feature gives open-ended fund liquidity. 

A person can enter or exit an open-ended mutual fund at any point of time. They do not even need to worry about the entry or exit load. 

Investors can leave the management of the fund on professionals. There are fund managers who take care of such investment.

What is close ended fund?

Closed ended fund are insistent type of fund. A person cannot decide to enter or exit this mutual fund on his/ her own. 

Investors can enter the close ended fund only during new fund offer (NFO). And they can exit the mutual fund only on the date of maturity. 

These funds are managed by brokers. The lock in period of this fund varies depending on type of investment. 

Venture capital, private equity and real estate fund are some common examples of this MF.

Only a fixed number of unit fund can be traded in a close end fund. 

Since the funds here are traded in stock exchange, it allows investors to buy or sell the units based on recent trading price.

Unlike other mutual fund instruments, close ended mutual fund do not have SIP investment. A person needs to invest all the money in a lump sump amount. 

Close ended funds are full of uncertainties since there is not tracking and record of the data.

How are open-ended fund and close ended fund any different?

The main difference between open-ended and closed ended account is that open-ended account allow entry and exit into the fund as per the will of the investor.

And they do not even have any entry-exit load. 

However, the later can be entered only when the NFO announces fund units.

Open-ended fund do not have maturity period whereas close ended fund are bound by maturity period.

Close ended fund cannot be liquidated until the expiry of lock in period. Open-ended fund are highly liquid in nature.

Based on safety and transparency, open-ended fund track records and data of the market and funds invested. 

But, close ended fund are not on the safe side on this parameter.

Closed ended fund invest in the market which lets investors trade the units based on real-time price. 

Open-ended fund do not operate in share market and the units are traded on NAV.

Open-ended fund lets people invest through SIP method or as lump sump as well whereas close end fund can only be funded in lump sump amount.

The Bottom Line

Mutual fund is a popular instrument of investment. People consider mutual fund to be safe and transparent.

A person can invest in a mutual fund either in an open-ended fund or closed ended fund. 

Both the aspects are worth giving a thought as they carry their potentials and demerits as well.

Open-ended fund is most approached MF as they are transparent and do not carry much risk. 

Close ended fund are lesser known by investors as they are risky ventures.

Further Reading:

Team R Wealth

Team R Wealth

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