Mutual funds come in various forms depending on the duration of a scheme to the type of investment. When it comes to the period of investment, mutual funds can be classified as open-ended mutual fund and close ended mutual fund.
Open ended mutual fund
This type of fund never seems to close. This means investors can keep buying the units at the net asset value on a continuous basis.
Let's cite an example. Let's assume there is a scheme called Goodreturns Top 500 Equity Scheme. The scheme was launched in 2006 at Rs 10. So, investors who bought in 2006 bought the scheme at Rs 10.
Now, as the scheme has invested over the last 8 years it keeps generating returns and the net asset value increases. From Rs 10, if it is now Rs 14, you would be investing at Rs 14. If, next month the scheme net asset value goes up to Rs 14.10, you can buy at that rate.
NAV is declared every day and you buy at the NAV. This means the scheme never closes and you buy and sell on a continuous basis.
On the other hand, if you want to the sell the Unit you can sell the same back to the mutual fund at the NAV. So, the scheme, never closes and hence it is open ended.
Close ended-mutual fund
A close ended mutual fund keeps the scheme open for a fixed duration. The New Fund offer or NFO may stay open for say 10 days, after which no units are not bought and sold.
The Fund will then invest the proceeds and there is a fixed redemption day, on which it will redeem the units. For example, a mutual fund scheme B, which was launched at Rs 10 on April 1, 2014, can redeem the scheme on March 31, 2018.
The scheme would be redeemed at net asset value after the period, upon which investors will get their money back.
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Generally open ended schemes are perceived to be better because they have generated superior returns in the past. However, one needs to carefully examine the portfolio before investing in a particular scheme.