Open Ended vs Close Ended Mutual Fund Schemes
Imagine you’re at an all-you-can-eat buffet. You can walk in anytime, grab a plate, and leave whenever you’re full. Now, picture a pre-plated, fixed-menu dinner, where you pay upfront, eat what’s served, and leave. Flip the buffet and food with mutual funds and you’ve open-ended and close- ended funds.
What are Open-Ended and Close-Ended Mutual Funds?
Open-ended and close-ended funds are two types of mutual funds categorised as per their investment structure. As the name suggests, open-ended funds are always open for investments and redemption anytime.
These funds don't have any lock-in periods and you can buy or sell their units on any business day, much like a never-ending party you can join or leave anytime.
On the other hand, close-ended funds are mutual funds where your investments are locked for a specific period. You can invest in a close-ended fund during the new fund offer (NFO) and redeem your investment after the scheme's tenure is over.
Also, these funds allow you to sell units via stock exchanges at the prevailing market price if you wish to redeem and exit your position.
Open-End Fund Vs Close-End Fund
The table captures the differences between open-ended and close-ended mutual funds on various parameters:
| Parameter | Open-Ended Fund | Close-Ended Fund |
|---|---|---|
Meaning | An open-ended fund offers units for subscription continuously. | Units of a close-ended fund are available for subscription only during the new fund offer or NFO. |
Liquidity | As you can sell an open- ended fund anytime, it has high liquidity. | Close-ended funds have limited liquidity as you can’t sell them before maturity. |
Entry and Exit | You can buy or sell an open-ended fund anytime. | You can buy units only during the NFO period and sell after maturity or on the exchange. |
Mode of Investment | You can invest via SIP or lumpsum. | You can invest only in lumpsum. |
Maturity Period | Open-ended funds have no specific maturity period. | Close-ended funds have a specific maturity period. |
Open-Ended vs Close-Ended Mutual Funds: What Should You Choose?
Choosing between open-ended and close-ended funds depends on various factors. Answering these questions can help you choose between the two:
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Do You Like Flexibility? If yes, you can opt for open-ended mutual funds. You can enter or exit anytime, making it ideal for long-term investors who want liquidity.
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Are You Okay With a Fixed Term? If yes, then you can choose close- ended mutual funds. Since you can’t exit easily, it helps you stay invested without panic-selling.
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Do You Prefer Immediate Liquidity? This is a vital question. If yes, you can opt for open-ended mutual funds. On the other hand, if you don’t require liquidity on an immediate basis, you can choose close-ended mutual funds.
Summing it Up
Choosing between open-ended and closed-ended mutual funds is like picking between a live concert and a recorded album. Both have their charm. However, the choice depends on your preference.
If you want freedom with your investments, you can choose an open-ended fund. On the other hand, if you are comfortable with a fixed term and don’t prefer immediate liquidity, you can invest in a close-ended fund.
