How open ended MF is different from close ended MF

[samkapoor77]

As a first time investor, I thought of investing in IDFC premier equity fund. The other day, I just discussed about my planning with my colleague. He asked me whether I will be purchasing an open ended MF or close ended MF. I had no answer to his question. Please tell me the difference between two and something about their listing.

[samkapoor77]

Close ended mutual funds have a lock-in period and they have a fixed maturity date whereas there is no maturity date for open ended mutual funds. Close ended MFs are listed but their redemption will be on discount.

[Anonymous]

All types of mutual funds (MFs) are managed by expert professionals and work towards a common aim of providing high returns on the initial investments. The only reason for classifying them into diffrent categories is because of the nature of investments and the risk profiles. For instance, on the basis of investment structure, mutual funds can be classified as open-ended or MFs or close-ended MFs.

A key difference between open-ended MFand close-ended MF is the fact that open ended MFs do not have a limit on the issuance of share and are not traded in the open market. Their value is depended on the Net Asset Value (NAV), which reflects the fund’s underlying security rate and may fluctuate on a daily basis. They can be bought either through direct mutual funds or through a regulatory platform at their fair market price. The trading of an open-end MF happens on a continuous basis. This offers a major advantage as investors can enter or exit the scheme any time.

In contrast, the close-end MFs are introduced through an IPO (Initial Public Offering) and are traded openly into the market, just like stocks. These MFs are sold at pre-fixed set units and have a lock-in period. As a result, investors can participate only when the NFO (New Fund Offer) is open and cannot go for early redemptions. These MFs tend to have a relatively stable value as compared to open-end MFs. However, they cannot be directly purchased and have to be brought through brokers. This calls for an active style of management as the NAV, in this case, is dependent on the demand and supply.

For investors with limited time in their hand, open-end MFs are the best options as they offer an easy exit. However, from a long-term investment point of view, the closed-end MFs are the best option. The profits earned from a open-end MF are privy to the existing market conditions and may fluctuate from the initial investments. However, going by recent market trends, open-end MFs have outperformed close-end MFs in the market. This is because an investor who has a considerable knowledge of the market can now easily redeem the open-ended MFs when the market conditions are conducive and exit with his/her profits. Also, unlike closed-end MFs, they offer for a systematic purchase and provides an option for small, multiple investments. This fact especially comes in handy during asset allocation or rebalancing in case of emergencies.

[Author]

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