Mutual fund schemes come in all shapes and sizes, with distinct characteristics for each of them. Thus, investors have plenty of choices, but it also means understanding each scheme's features, advantages and disadvantages and the salient points of difference between different schemes. Understanding these aspects can help investors make informed decisions on the type of mutual fund scheme that is likely to work best for them.
One such decision investors might make is choosing between open-ended mutual fund schemes or close-ended Mutual funds Schemes. This article will explain the two types of funds and their notable differences.
What are closed-ended funds?
A close-ended mutual fund is one where your investment is locked in for the entire tenure of the scheme. You can subscribe to close-ended schemes only during the new fund offer period, and only after the tenure of the scheme ends can you redeem the units. Hence, there will be neither outflows nor new money coming into the fund during this period. However, to provide an exit option to investors, units of close-ended funds are listed on stock exchanges. This enables investors to buy and sell units in the secondary market.
What are open-ended funds?
An open-end fund is a
mutual fund scheme
that is available for subscription and redemption throughout the year, (akin to a savings bank account, wherein one may deposit and withdraw money every day). An open-ended scheme is perpetual and does not have any maturity date (except for ELSS and Retirement funds). The key feature of open-ended funds is liquidity.
Difference between Open Ended & Close Ended Fund
Liquidity:
The liquidity aspect of open-ended mutual funds generally makes them popular with investors. Except for Equity Linked Savings Schemes (ELSS) and
Retirement Funds,
most open-ended funds don’t come with lock-in-period, enabling investors to buy and redeem units anytime during the scheme's tenure. ELSS is an exception to this as the investment can help you save tax under Section 80C of The Income Tax Act, 1961 and is aimed at your long-term goals. The lock in period for ELSS is 3 years. Retirement funds, also known as pension funds, are investment options that allow an individual to save a certain portion of their income for their retirement. These funds offer a regular source of finance after one retires and have a lock in period of 5 years.
Mode of investing:
You can subscribe to a close-ended fund only during the new fund offer period. There is no such restriction in the case of open-ended funds, where an investor can invest at any point during the scheme’s duration.
Systematic investment plans (SIPs):
Since many salaried individuals might prefer investing in mutual funds through the
SIP
route, open-ended funds are likely to be their preferred choice. This is because a fixed amount can be invested in a scheme at regular intervals, an option not available in close-ended funds because the only time you can invest in them is during the new fund offer.
Maturity period:
There is no set maturity period in an open-ended fund, but close-ended funds typically have a fixed maturity period ranging from 3 years upto 10 years.
To conclude
While open-ended funds generally tend to be the preferred choice with investors, at the end of the day, whether you want to put your money in close-ended or open-ended funds will depend upon your investment objective and whether the features of the scheme align with your risk appetite and financial goals.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
