KNOWLEDGE CENTRE Mutual Funds Comparison / Difference between Open-Ended and Close-Ended Mutual Funds

Difference between Open-Ended and Close-Ended Mutual Funds

Mutual fund investments are one of the most attractive investments instruments available in the market today. They are an ideal mix of the least possible risk with relatively higher returns. The two main types of funds are open-ended and close-ended funds.

The major difference between open-ended and close-ended mutual funds is that investors can enter and exit open-ended funds as per their convenience, whereas for close-ended funds, investors can only buy-in during the New Fund Offering (NFO) period or from the stock exchange after they are quoted. The detailed difference between open-ended and close-ended mutual fund is listed in the table below:

Parameter Open-Ended Mutual Funds Close-Ended Mutual Funds
Buy-in period Investors can buy-in or buy-out any time they wish Investors can buy-in only during a limited period
Investment tenure These are perpetual funds with no fixed maturity date The investment tenure is between three years to five years
Listing No listing on any stock exchange Listed on recognized stock exchange
Pricing Net Asset Value (NAV) divided by the number of outstanding shares Determined by the supply and demand of the shares/units
Number of shares issued No limit Limited and fixed
Trading The fund house manages the trading of the shares/units The shares are traded on the stock exchange they are listed on.
Mutual fund lock-in period There is no lock-in period and investors can exit at any point in time Once entered, investors have to stay invested for the entire tenure

Now that you understand the difference between open-ended and close-ended mutual fund, below are some more details about both these types of mutual fund plans.

Advantages of Open-ended funds

Open-ended funds give you the flexibility of buying-in and exiting at your will and thus, you can always switch to a better performing fund in case the research you did prior to investing is coming across as inaccurate based on the current performance. This could happen simply because equity markets are extremely difficult to predict. Even if the fund of your choice is performing as expected, there could be a better-performing fund that you would want to switch to, which was not present earlier.

The price of the shares is determined by the past performance of the fund and the earnings made. However, since there is no limit on the number of shares that can be issued, the demand of the shares tends to have little impact on the pricing, particularly since the supply is virtually inexhaustible.

The details on the performance of the fund are only available through the fund house, particularly for the list of assets invested in. However, this could raise a doubt as to the neutrality of the performance data, since they are regulated and closely monitored by the Securities and Exchange Board of India (SEBI), there is virtually no room for error or misappropriation.

Advantages of Close-ended funds

Unlike open-ended funds, close-ended funds can only be bought in at the time of the IPO and thereafter from the stock exchange that it is listed on. Since it is listed on the stock exchange like equities, the current owner of the share(s) decides the price at which the owner wishes to sell them. This decision, in turn, is directly related to the demand for the same.

There are only a limited number of shares available and thus, better performing funds could be trading at a high premium, while underperforming funds could be trading at a discount. There could be investors that could be using speculation and manipulation to earn surreal margins; however, the ever-watchful SEBI would quickly recognize and correct such activity.

Once invested in close-ended funds, you must stay invested for three to five years unless you are able to liquidate your shares on the stock exchange. This reduces the liquidity and attractiveness of the same in comparison with open-ended funds.

If you do not mind staying invested for a longer mutual fund lock-in period, close-ended plans are the ideal mode of investment.

Choosing the right investment tool and mode should be done based on the results of thorough research. The ARQ investment engine provides personalized mutual fund recommendations based on evaluations run by machine that takes into account all the available information on the instruments and their past performances.

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