Is your mutual fund open or close-ended? Know the difference
The main difference between these two types of funds is the liquidity and simplicity upon which the sale and purchase of fund units are based.
Most mutual fund investors probably don’t pay much attention to whether their fund is open-ended or closed-ended. The truth is that when most people talk about mutual fund investments, you can assume they are referring to open-ended funds.
Mutual funds are classified as either open-ended or closed-ended based on their structure. The main difference between these two types of funds is the liquidity and simplicity upon which the sale and purchase of fund units are based.
Difference
Now let’s understand in more detail what open-ended and closed-ended funds are and what the difference between them is.
A closed-ended fund is a type of mutual fund that is launched with a fixed number of units by a fund house. It also has a predetermined maturity period. Once the New Fund Offer (NFO) is closed, no further investments can be made in it. Assets are accumulated in this mutual fund through an Initial Public Offering (IPO).
In simple terms, a closed-ended fund “closes” after the initial launch period and continues to operate until maturity. This provides the fund manager with additional convenience in fulfilling the investment objectives of the fund. Like all mutual funds, closed-ended funds also have an expense ratio, which can often go up to 2%.
Now let’s understand what open-ended mutual funds are.
In open-ended mutual funds, there is no limit to the number of units that can be issued. Investors can buy or sell units from a fund house based on the current Net Asset Value (NAV) of the scheme on any given day. Their NAV is based on the performance of the underlying securities of the fund. These schemes do not have any maturity date.
Main difference
The main difference between open-ended and closed-ended mutual funds lies in liquidity, which refers to the ease of buying and selling.
In open-ended mutual funds, you can easily redeem the units. You can visit the asset management company’s office or sell them online through a demat account. The AMC will purchase the units from you at the current NAV.
On the other hand, in closed-ended funds, you can purchase units only during the “New Fund Offer” period, and your investment is locked in for a predetermined period. Moreover, you can redeem the units only upon maturity, which means you cannot sell them before that.