Open-ended and closed-ended funds are both mutual funds. That’s where the similarity ends. Confused as to which one to pick while investing? Read on to know more.
What are open ended mutual funds?
Open-ended mutual funds are those that people synonymously use with mutual funds. Open-ended funds can be bought or sold in demand on a daily basis at their Net Asset Value (NAV). The NAV changes daily and there is no restriction on the number of units the fund has.
Open-ended funds are highly liquid as they can be redeemed anytime. Investing in these funds is highly convenient as one can enter and exit from it anytime. One can invest in open-ended mutual funds even after its NFO closes. Before investing in open-ended funds the investor can check the fund’s historic performance under different market cycles. One can invest in open-ended funds through SIP. Hence, it makes investing easy for the salaried class.
However, open-ended funds come with its own set of disadvantages. They are exposed to market risk. The NAV of the funds moves according to the movements of its underlying benchmark. The investors do not have a say in the asset composition of open-ended funds. Also, all the decisions are taken by the fund manager.
What are closed ended funds?
Closed-ended mutual funds are those who have a fixed asset base and a fixed number of units. These units are traded on a stock exchange. The Net Asset Value (NAV) of the fund doesn’t change on a daily basis. Investors do not have an option to buy the units of a closed-ended fund after the NFO closes. Existing investors also cannot exit from the fund until the term of the closed-ended fund ends. However, to ensure liquidity the fund is traded on a stock exchange and investors can buy or sell units on the exchange. Also, a closed-ended fund has a fixed maturity period.
Closed-ended funds have a stable asset base giving an opportunity to the fund manager to devise a strategy without worrying about the inflows and outflows from the fund. These funds are available at market prices and trade just like equity stocks on exchanges. They give an opportunity to the investor to buy and sell units on the fund.
However, closed-ended funds have their own set of disadvantages. There is no SIP option available for these funds. One has to invest in a lump sum at the time of the NFO risking their investment. Hence, this might be risky and not ideal for salaried class investors who want to invest in small amounts regularly or for those who want less risk. One cannot track the fund’s historic performance in a closed ended fund before investing. Also, all they have to decide is the fund house, the manager and the strategy he proposed to use for the fund.
Open ended vs. closed ended funds
|Parameter||Open Ended Funds||Closed Ended Funds|
|NAV||Changes daily||Listed at the time of NFO|
|Listing on stock exchange||No||Yes|
|Entry and exit||One can invest and redeem any time||One can invest only at the time of NFO and exit after the fund matures|
|Liquidity||Investment can be redeemed anytime.||Partly liquid due to listing on stock exchange|
|Asset Base||Keep changing||Stable asset base|
|Freedom to fund manager||Fund manager is under pressure of operating under fluctuating asset base||Fund manager doesn’t have to worry about the withdrawals as asset base is stable|
|SIP||Investors can invest through SIP||Investors can only invest at the time of NFO in lumpsum|
|Risk||Less risk to investors when compared to closed ended funds||Higher risk than open ended funds|
|Track record||Investors can see the fund’s previous performance and decide accordingly whether to invest or not.||There is no past performance of the fund for the investor to understand the fund’s performance.|
The below table shows the top funds in large, mid, small and multi-cap categories for both open and closed-ended funds. We can see that the open-ended funds have performed well in most of the categories.
We can clearly see that open-ended funds have performed better than closed-ended funds. Hence, there is clearly a winner here.
Choose wisely before you invest! At Upwardly we help you by providing a customized portfolio that best suits your financial condition and goals. Happy investing!