Tag: What is Open-Ended Mutual Fund

4 differences between open ended and close ended mutual funds

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:

  1. 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.

  1. Listing:

Open ended mutual fund schemes are not listed on exchanges, while close ended mutual funds are listed on exchanges.

  1. 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.

  1. 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.

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.