There are different sub-categories in mutual funds that can be classified as risk attached, investment philosophy and a lot. The two types of mutual funds that stand out are open ended and close ended mutual fund schemes.
What is open ended mutual fund?
Open ended funds are known as mutual funds. These funds do not trade in the open market. They do not have a limit as to how many units they can issue. The NAV changes daily because of the market fluctuations of the shares or stocks and the bond prices in the fund. Open-ended mutual fund units are bought and sold on demand at their Net Asset Value or NAV that is dependent on the value of the fund’s underlying securities and is estimated at the end of every trading day. An investor will units directly from a fund. Investments of open-ended funds are valued at fair market value which is also closing market value of listed public securities. Funds also do not have a fixed maturity period.
What is close ended mutual fund?
Close ended fund issues a fixed number of units which are traded on the stock exchange. They function more like an exchange-traded fund than a mutual fund. They are launched to raise money and are traded in the open market just like a stock. Through the value of the fund is based on the NAV, actual price of fund is affected by supply and demand since it is allowed to trade at prices above or below their actual or real value. Close ended funds are bought and sold through brokers. A closed ended mutual fund is generally traded at discounts to their underlying asset value. Funds have a fixed maturity period. Portfolio managers will get a stable base of assets that is not subject to frequent redemptions.
4 differences between open and close end funds:
- Liquidity:
In terms of liquidity, open ended mutual fund schemes offer 100% liquidity and it can be redeemed anytime the investor sees fit. Close ended funds do not offer liquidity and they have a fix lock-in period.
- Listing:
Open ended mutual fund schemes are not listed on exchanges, while close ended mutual funds are listed on exchanges.
- Freedom to fund manager:
In case of an open-ended mutual fund, the fund managers will have to stick to the objective and redemption pressure. While in case of a close ended mutual fund, the fund manager will have full freedom since there is no pressure of redemption.
- NAV:
The NAV will reflect 100% value of the assets and securities while the close ended mutual funds are listed at a discount due to the liquidity pressure.
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