Mutual funds are one of the go-to types of investment methods by the Indians. In India, Mutual funds are classified into two types – open and closed. This blog will explain both the mutual funds and the critical differences between them.
Close-ended mutual funds:
The investment in a closed-ended mutual fund scheme is locked in for a set length of time. 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. However, some closed-ended funds become open-ended once the lock-in period expires, or AMCs may transfer the proceeds of closed-ended funds to another open-ended fund after the maturity term. However, this requires the approval of the closed-ended fund’s investors.
When comparing open-ended and closed-ended funds, some investment experts argue that a closed-ended fund’s lock-in period ensures that the fund’s assets remain stable due to the specified lock-in period, allowing the fund manager to create a portfolio with long-term growth potential without fear of outflows through redemption, as an open-ended fund does.
Open-ended mutual funds:
The name open-ended funds come from the fact that they are always available for investment and redemption. In India, open-ended funds are the most popular type of mutual fund investment. These funds have no lock-in time or maturity dates, so they are always available. In general, open-ended funds have no upper limit on the amount of money they can accept from the public (in terms of AUM). The NAV is determined daily in open-ended funds based on the value of the underlying securities at the end of the day. Typically, these funds are not traded on stock exchanges. The main distinction between open-ended and closed-ended mutual funds is that open-ended funds always provide high liquidity. In contrast, closed-ended funds only provide liquidity after the stated lock-in period or at fund maturity.
Difference between open and closed mutual funds:
Both these mutual funds can be differentiated based on five key features, and they are:
You can purchase or sell units in open-ended funds at any time, except for ELSS funds, which are locked in for three years from the date of investment. When comparing open-ended funds to closed-ended funds, this is the primary advantage. During the lock-in period, closed funds provide no liquidity. Only after the mandatory lock-in time has ended will redemption proceeds be received.
- Investing methods:
You can invest in open-ended funds both in a lump sum and through SIPs. In reality, you can make as many purchases as you like in the fund. You can only invest in closed mutual funds during the new fund offer period (NFO). SIPs are not an option for investing.
- Track Record:
You can invest in open-ended funds by looking at the performance of the schemes you want to invest in. There is no track record for closed-ended funds because you can only buy them during their NFO term.
- Minimum Investment amount:
You can start investing in open mutual funds with as little as Rs 500 or Rs 1,000. In most cases, a close-ended fund requires a minimum commitment of Rs 5,000.
- Rupee cost averaging:
You can profit from rupee cost averaging unit prices in open-ended mutual funds by investing in SIPs. You can also invest based on market levels if you lump cash. When the markets are down, you can add more units. Closed funds do not allow for averaging because they do not accept new assets after the NFO period.
People frequently ask whether open-ended or closed-ended mutual funds are better. While we cannot guarantee anything based on the inputs from the investors, we believe that open-ended funds are a superior option. They allow you to invest whenever you want based on your surpluses and are highly liquid because they may be redeemed at any moment.
Open-ended funds are also preferable 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. Also, no matter what type of investment you choose, the arsenal of services and products at Tradeplus will help you.