Close-ended vs open-ended mutual funds comparative analysis

Mutual funds are a great way of using your financial resources to multiply your wealth. With just a basic knowledge of the markets, you can easily invest. When investing you must keep your financial goals in mind and select the type of mutual fund that suits you best.

Mutual funds are of two types- Open-ended mutual funds and close ended mutual funds. Although both these types aim to gain dividends on the investment and exceed the investment, they are vastly different. To help you decide which type is appropriate for your needs, here is a comparative study of the two.

What is Open-Ended Mutual Fund?

• You can enter and exit the investment at any time. They offer you the scope of continuously buying and selling the units. This makes them flexible.
• Open-ended mutual funds are not up for sale in the open market. Therefore, price change depending on the number of shares bought or sold.
• They do not have a predetermined maturity period.
• The NAV for this type of mutual funds is the quotient of Total Asset Value and the number of outstanding shares.
• It can use both active and passive management style.
• Wise entry and exit choices ensure better profits.
• They are easily liquidated
• You can make smaller investments with open-ended mutual funds.
• The NAV is published daily in newspapers.
• The selling price of these stocks is the sum of NAV and entry or exit load.
• They are highly volatile and have higher risks.

What is Close Ended Mutual Fund?

• These have a fixed number of shares that are purchased for a definite period. Buying and selling of stock are permitted for a set period.
• They are introduced through an initial public offering and then listed
• They have a maturity period of 2 years to 5 years.
• Demand and supply forces determine the value of these mutual funds.
• Active management style works best for a close ended mutual fund.
• You get the benefits of capital gain from selling the shares when their value is more.
• They are mostly illiquid.
• The NAV is updated weekly.
• The selling price of the close-ended mutual fund is a percentage of discount on the NAV.
• They have lower risks associated with them.

Both types of investments have their share of advantages and disadvantages. Your choice would depend on your financial goals, ability to take risks as well as knowledge of the market. If you are a small-time investor with limitations on capital, open-ended mutual funds should offer you the flexibility along with stable returns. The close-ended mutual fund is a better option for seasoned investors. However, you should invest in the type of mutual fund that allows you to meet your financial objectives in the most effective time duration.