Understanding the difference between open ended and closed ended mutual funds
Mutual funds are classified according to various factors, including their sector, size, asset class and flexibility. These include open ended funds and closed end funds. The fundamental difference is that while an open ended fund opens to investors on a continuous basis, a closed end fund is only available for a limited period of time.
Here are a few other differences between the two funds:
You can buy or sell open ended funds at any time, but you can buy closed-ended funds only during NFO (New Fund Offer) or from the stock exchange after they are listed. In the case of an open-ended fund, the fund is open for a subscription even after the closure of NFO and the units can be redeemed whenever required by the investors. But in the case of a closed-ended scheme, the fund liquidates once it crosses the maturity date, and the funds are distributed to subscribers based on their holdings. In few cases, closed-ended funds can be converted into open-ended funds after maturity.
While open ended funds don’t have a fixed maturity or corpus, the closed funds have a fixed corpus and a term usually ranging from three to five years. So if you are looking to invest in a closed ended fund, you must be prepared to block those funds for a specified period. In an open ended fund, however, you can buy or sell whenever you want. The constant buying and selling in an open-ended fund makes the corpus variable, while in a closed ended scheme, the corpus is fixed at a specified limit.
Liquidity and listing
The liquidity in the case of open ended funds comes from the actual fund, while in the latter it comes from the market. An open ended fund, however, is not listed on the stock exchange, and all transactions are performed directly through the fund. Closed ended funds are listed on a reputed stock exchange to provide liquidity to the investors.
You can transact in the open ended mutual fund at the existing NAV (Net Asset Value) of the scheme. Unit price is also known as NAV. However, closed ended scheme prices may be different from the NAV because they trade on exchanges.
There are other technical differences in both funds, but the above are the fundamental differences which should influence your decision on whether to invest in closed ended or open ended mutual funds, or both.
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