Mutual funds (MFs) are of two types – close ended and open ended. But what is the difference between these? If we do a close-ended versus open-ended comparison, is one better than the other? Is there any advantage in opting for one over the other?
Open ended fund
An open-ended fund is a mutual fund scheme that is available for subscription and redemption on every business day throughout the year. These schemes have no maturity date . Open ended schemes are akin to a savings bank account, wherein one may deposit and withdraw money every day.
Close ended fund
Contrary to the open ended scheme, a close ended have a specific maturity period. Close ended funds are not open on all business days but only during the initial launch and in order to redeem at specified periods of time. This will either be done post- launch or later depending on when the AMC specifies. The specified maturity period may last for three months, six months or a year or more. It works like fixed deposit schemes.
The basic difference
In Open Ended schemes, the fund manager has to stick to the objective of the schemes. There is also pressure on fund manager because investors are free to redeem money. In Closed Ended scheme, there is no pressure of redemption on the fund manager.
Open Ended schemes are very liquid. You can redeem anytime. While Closed Ended schemes have a fixed lock-in period.
NAV (Net Asset Value)
When you buy Open Ended schemes, you buy on the existing NAV of the scheme. However, Closed Ended schemes can have different NAV compared to the price that you buy because they trade on exchanges.