Open ended mutual funds allow investors to buy and sell shares at any time, while closed end funds have a fixed number of shares traded on a stock exchange. Open ended funds are considered more flexible and less risky, while closed-end funds offer the potential for higher returns and diversification benefits.
Open-Ended vs Close-Ended Mutual Funds
The table below talks about the differences between an open-ended and closed-ended mutual fund in more detail.
Examining the Advantages of Mutual Funds
Close-ended funds carry the following advantages.
- Market Prices - Close-ended mutual funds ordinarily trade on stock exchanges, enabling investors to buy and sell their fund units keeping in mind real-time prices that may fall above or below the fund’s NAV. Stock trading strategies like margin trading and limit orders can be taken advantage of.
- Steady-Asset Base - Here, investors are entitled to redeem their units only at the time of maturity. As a result, portfolio managers have access to a steady asset base that isn’t being redeemed with frequency. This steady asset base permits fund managers to execute their respective investment strategies more easily.
- Enhanced Liquidity - While investors may only liquidate their units keeping in mind fund norms, they can do so at prevailing market prices. This provides the flexibility needed such that they can use real-time information to determine how to tackle their investments.
Open-ended funds carry with them the following advantages.
- Liquidity – There exists a high level of liquidity among open-ended funds whose units can be redeemed at any time, keeping in mind the NAV.
- Listed Track Record – The historical performance of open-ended funds across different market cycles is available, enabling investors to make informed decisions. Close-ended funds do not disclose this information.
- Systematic Investment Form – Open-ended funds can be invested via systematic investment plans. This allows individuals who don’t have access to a large amount of money to invest in the fund. In this regard, open-ended funds fall in contrast to close-ended funds, where lump-sum investments are the only method of investing.
De-merits of Mutual Funds
Open-Ended Mutual Funds
The following drawbacks are associated with open-ended mutual funds.
- Market Risks – Despite a fund manager’s attempt to maintain a highly diversified portfolio, these funds are subject to market risks. The NAV fluctuates daily according to the movements of the underlying benchmark.
- Fund Management Alone Selects Assets – Investors don’t have a say in the securities that an open-ended fund invests in as they are the responsibility of fund management.
Close-Ended Mutual Funds
The following drawbacks are associated with close-ended mutual funds.
- Sub-par Performance – The performance of close-ended schemes hasn’t been favourable compared with that of open-ended schemes across different timelines. The lock-in period of these funds hasn’t been able to improve returns drawn significantly.
- Lump-Sum Investments – The only way to invest in a close-ended fund is via a lump sum investment at the time of the fund’s launch. Not everyone can afford to make lump sum investments. Moreover, they can be risky as they require you to take big bets.
- Track Record Not Visible – Since investors can’t see the track record of a close-ended mutual fund in different market cycles, there exists a lot of uncertainty. These feelings relate to whether or not the fund manager is dependable on delivering the desired returns.
Given the above mentioned factors, it’s hard to say whether open-ended funds are superior to close-ended funds or vice versa. Ultimately, the performance of both fund styles depends on the fund management in place, the investment style adopted and the fund category. It’s always wise to thoroughly research the funds before deciding where to invest. And once you’ve decided, what better app to choose from than the Fi app? You not only get a plethora of funds to choose from, but the process is user-friendly and can be done in minutes!
Read more about mutual funds here: Latest MF Schemes, NAV
Frequently Asked Questions:
1. How do I know if a mutual fund is open-ended?
The biggest giveaways that make clear that a mutual fund is open-ended are as follows.
- Its units can be bought and sold at any time, keeping in mind the NAV.
- There is no lock-in period imposed on you.
2. Who should invest in open-ended mutual funds?
If you cannot afford to make lump sum investments, open-ended mutual funds are ideal for you as they allow investors to make smaller yet frequent investments via systematic investment plans. Further, if you have a low threshold for risk, open-ended funds are a good idea as it is possible to assess their historical performance and make an informed decision.
3. What is the difference between open-ended and closed?
The most glaring difference between open-ended and close-ended mutual funds relates to purchasing their units. While the former can be purchased constantly, the latter is only available during a restricted timeframe. Another pronounced difference is that close-ended funds have a lock-in period while open-ended funds do not.
Other differences between the two funds relate to their fund size, listing, outstanding share status, source of liquidity, units on offer and the time frame needed to conduct a transaction.
4. Is an index fund open-ended?
Index funds are open-ended mutual funds that aim to mimic an index or benchmark.
5. Is it reasonable to invest in close ended mutual fund?
Investing in closed-ended mutual funds can be reasonable, but assessing factors like performance, track record, and underlying assets is essential before deciding. Consider your risk tolerance and investment horizon.
6. What is the disadvantage of closed-end funds?
The main disadvantage of closed-end funds is that they can trade at a premium or discount to their net asset value (NAV). This means that the market price of the fund's shares may be higher or lower than the actual value of its underlying assets. Additionally, closed-end funds typically have limited redemption options, making it harder for investors to exit their positions.