Open-Ended vs. Closed-Ended Mutual Funds: What’s best for you?
There are different types of mutual funds available in the market, which are classified on the basis of several parameters, ranging from the nature of investment, philosophy behind it, and the various risks involved. A very popular and common basis for distinction is the fund structure; open-ended or closed-ended. Here we weigh the pros and cons of both the funds, so that you can decide on the best fund for your needs.
What is an Open-Ended Mutual Fund?
They’re called open ended, because these funds buy and sell units on a continuous basis. This gives a lot of freedom to investors, who have the right to enter and exit an investment as per their liking and convenience.
The units are sold according to the Net Asset Value (NAV) declared by the fund. The units, which normally have an initial offering period, can also be sold after that offering period is over. This is only allowed in open-ended funds.
This is also why the unit capital of open-ended funds are continuously varied, since new units are consistently bought and sold. The size of the funds depend on the number of units they are selling. These funds also trade at the closing price at the end of the market day. However, the catch is in the fact that they cannot keep selling units. If the management feels that it is unable to manage a fund of a certain size, it can stop accepting new investments. There are several NBFCs, like Bajaj Finserv, for instance, who offer mutual fund investments with low transaction costs.
What is a Closed-Ended Mutual Fund?
They’re referred to as closed-ended since each unit has a fixed capital amount associated with it. In these types of funds, the investors cannot buy the units once the New Fund Offer (NFO) period is over. This also means that new investors aren’t allowed to enter, and that existing ones aren’t allowed to exit until the term of the scheme ends. Closed-ended funds also trade on the stock exchange, rather than being redeemed by the fund.
Though closed-ended funds are sometimes criticised, they have their share of advantages. These funds don’t have to worry about the redemption of shares. This allows them to lower their liquidity ratios and invest more capital in the market. Because of this, they often generate greater returns as compared to open-ended funds. Several companies like Bajaj Finserv, for instance, offer mutual funds through tie-ups with 14 prestigious asset management companies.
The Difference Between Open-Ended and Close-Ended Mutual Funds
As it stands, open-ended funds offer a lesser risk with an average award. This is still highly preferable when compared to a greater risk, with a fantastic award. The choice boils down to how accurately one is able to predict market fluctuations. With such a liquid economy, it is fairly hard to do so. However, investors are best advised to compare individual products in an asset class. The differences may be vast, and some might even prove beneficial in a closed-ended fund rather than an open ended one. In case you are looking to build your portfolio, companies like Bajaj Finserv, offer you a list of trending funds to invest in.
Ultimately, investing in mutual funds is a fairly risky proposition which can make or break your fortune. It all boils down to you choosing what’s best for you.