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How Open-Ended Fund Is Better Than The Close-Ended Fund?
You might have heard the term open-ended mutual fund and close-ended mutual fund. If not, then you might hear it in near future, and feel confused. Investors who have heard it and have some idea, but are still confused which one fund is better and why? This article might help you out.
In India, mutual funds are classified into two categories based on their investing structure, that is open-ended funds or closed-ended funds. The distinction between open-ended funds and closed-ended funds are based on investing flexibility and how easily they may be purchased and sold. While open-ended funds can be purchased and sold at any time, closed-ended funds can only be purchased at the time of its introduction and can only be redeemed after the fund's investment period has concluded.
The Open-Ended Funds
An open-end fund is a diversified pooled investment portfolio that can issue an infinite number of shares. The fund's sponsor sells and redeems shares directly to investors. The current NAV (Net-Asset value) of these shares is used to price them on a daily basis. Open-end funds include mutual funds, hedge funds, and exchange-traded funds (ETFs).
In India, open-ended funds are the most popular type of mutual fund investing. These funds have no lock-in time or maturity dates, so they are always available.
The Close-Ended Funds
A closed-end fund is also a mutual fund but it is different when compared to open-ended funds. In Close-ended funds, to raise capital for its initial investments, funds issue a fixed number of shares in a single IPO. Its shares can then be purchased and sold on a stock market, but no new shares or money will be produced or flow into the fund. Close-ended plans can only be subscribed to during the new fund offer period (NFO) and the units can only be redeemed once the lock-in period or the scheme's term has expired.
An open-ended fund, such as most mutual funds and exchange-traded funds (ETFs), on the other hand, takes fresh investment money continuously. On-demand, it issues new shares and buys back its existing shares.
How open-ended is different from closed-ended funds?
The biggest difference between an open-ended and a closed-ended mutual fund is that open-ended funds always provide high liquidity, whereas closed-ended funds only provide liquidity after the stated lock-in period or at fund maturity.
Difference between Open-ended and close -ended funds:
| Basis of difference | Open-ended Mutual Funds | Close-ended Mutual Funds |
|---|---|---|
| Determination of share prices | At the net asset value NAV. | Decided by demand and supply. |
| Maturity time period | Not fixed maturity period | Fixed period (3-5 years). |
| Offerings of units | Keep offering in continuous series of mutual fund new units or shares for sale | Offer new units or share to an investor for a restricted period. |
| Listings | Not listed on exchanges | Listed on exchanges |
| Liquidity Provider | A fund itself is a liquidity provider. | The stock market is a liquidity provider. |
| NAV | Returns 100% value of the assets and securities. | Is enrolled at discounted due to liquidity pressure. |
| Capitalization | Unlimited | Limited |
| Outstanding share status | Doesn't remain constant. | Remains constant. |
| Fund size | Flexible | Fixed |
| Transactions | Performed at the day end. | Performed in real time. |
Conclusion
With all the pros and cons and a comparison between Open-ended and close-ended funds seems open-ended funds are a better option. After all, they allow you to invest whenever you want based on your surpluses and are extremely liquid because they may be redeemed at any moment.
Open-ended funds are also a preferable alternative because you can start investing with a small amount and invest over time through SIPs to accomplish your financial objectives. These are the fundamental differences between open-ended and closed-ended mutual funds, which give open-ended mutual funds the upper hand.
