Difference Between Open-Ended And Closed-Ended Funds: Everything You Need To Know

Based on the investment structure, mutual funds in India are of two types – open-ended and closed-ended funds. Before investing, you might want to consider their differences as it is a function of investment flexibility and the ease at which you can buy or sell them.

Considering this, here is an explanation of the basics of open-ended and closed-ended mutual funds, their differences and pros and cons. 

What Is an Open-Ended Fund?

Open-ended funds are one of the most common forms of investment in India that are always open to investments and redemptions. They are open perennially, meaning they do not come with a certain lock-in period. Therefore, investors can expect flexibility when buying or selling units of this fund. 

In addition, this fund’s NAV (Net Asset Value) is evaluated on the underlying securities’ daily value at the end of the day. However, these funds are not traded on stock exchanges. 

What Are Close-ended Funds?

In this type of mutual fund scheme, the investments come with a lock-in period. Investors can subscribe to these schemes only during the New Fund Offer (NFO) period and sell units only after the lock-in period or tenure of the scheme is over. 

Nevertheless, some Asset Management Companies (AMCs) can transfer the proceedings from a close-ended fund after its maturity to another open-ended fund. However, they need an investor’s consent to do so. 

While drawing differences between open-end and closed-end funds, experts argue that the lock-in period concerning the latter ensures the stability of assets. This allows the fund manager to create a portfolio with long-term growth potential. However, in the case of open-ended funds, there is always a chance of cash outflows during the redemption of units.

Also Read: 10 Best Performing Index Funds That Can Be A Part of Your Portfolio

Also Read: Equity Mutual Funds – Who Should Invest, Types, Taxation And Reasons To Invest

Also Read: Best Small Cap Mutual Funds To Invest In 2021

Advantages of Open-ended Funds

Liquidity

As an investor of this type of fund, you can sell units of your investment any time you prefer. Hence, mutual funds without a certain lock-in period are known to offer more liquidity compared to funds with a lock-in period.

Availability of systematic options

By investing in these funds, individuals can avail several systematic plans for both withdrawal and investment purposes. Some of these systematic plans include the Systematic Withdrawal Plan (SWP), Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP). 

Track record and past performance

The track record of these funds’ performance across different markets is available to all investors. By going through this data, one can know about the past performance of a fund and make an informed decision. 

Disadvantages of Open-ended Funds

Affected by market fluctuations

Although fund managers of open-ended funds maintain a highly diversified portfolio, these are vulnerable to market risks. Hence, the NAV of such funds fluctuates subject to the movement of the underlying benchmark. 

Vulnerable to large outflows and inflows

During sudden outflows, a fund manager may be compelled to sell his stocks. In such a case, it can cause a loss to all unitholders in the fund. 

Advantages of Closed-ended Funds

Stability in the asset structure

As this type of fund allows investors to redeem units after the maturity period, it provides fund managers with a stable asset base that is not affected by frequent redemptions. 

Trade on stock exchanges

Like any other equity fund, closed-end funds are also traded on stock exchanges, that is, they can sell or buy units in real-time. 

Flexibility and liquidity

Investors can easily liquidate these funds by selling them on the stock exchanges. 

Low operating costs

As these funds come with lower turnover rates and marketing costs, their operating and management costs are also relatively low. 

Thus, you can invest in a Navi Long Term Advantage ELSS (Equity Linked Savings Scheme) Fund Direct-Growth from Navi AMC and save taxes while aiming for long-term goals. Also, invest in a diversified portfolio with a lock-in period of just 3 years and obtain maximum returns from this fund. 

Disadvantages of Closed-end Funds

Before comparing open-ended and closed-ended funds, you may want to consider the limitations of closed-end funds:

Non-availability of track records

Unlike open-end funds, you cannot check the performance of closed-ended schemes over different market cycles. Therefore, while choosing a fund, a manager’s expertise plays a major role. 

You cannot invest through systematic plans

By investing in closed-ended funds, you only have the option of choosing a lump sum investment mode. 

Poor performance

These funds are likely to perform poorly than their open-ended counterparts historically. 

Differences Between Open-ended and Closed-ended Funds

Parameters	Open-ended funds	Closed-ended funds
Maturity period	They do not have a maturity period.	They come with a maturity period ranging from 3 to 5 years.
Fund management	Fund managers have to mandatorily stick to the investment objectives. Also, there is pressure on them as investors can redeem units any time they prefer.	Fund managers have no additional pressure as the investors’ assets are under a lock-in period.
Listings	These schemes are not listed on the stock exchange.	These are listed on the stock exchange.
Fund size	Flexible.	Fixed.
Transaction time	At the end of the day.	Real-time.
Price determination	Shares sold at an NAV declared by the fund.	Share prices vary depending on demand and supply.

Open and Closed-ended Mutual Funds: Which Is Better to Pick?

Features	Open-ended funds	Closed-ended funds
Liquidity	High liquidity because you can buy or sell units any time you prefer.	No liquidity during the lock-in period. You can redeem units once the maturity period is over.
Track record	You can check the performance track record of these funds before investing.	No track record is available.
Investing mode	You can invest in a lump sum or Systematic Investment Plans (SIPs).	Investment is possible only during the New Fund Offer (NFO).
Investment amount	Individuals can start investing with low amounts such as Rs.500 or Rs.1000.	Rs.5000 is the minimum investment amount for investing in this fund.
Rupee cost averaging	Due to the SIP investment mode, you can take advantage of rupee cost averaging.	No averaging facility is available as post NFO period you cannot add investments.

Final Word

Looking back, one may conclude that open-ended funds offer more flexibility than closed-ended ones. However, closed-end mutual funds offer more leeway for the fund manager helping them maintain a portfolio that can make long-term gains. 

Therefore, the decision of choosing between open-ended and closed-ended funds is entirely up to you. For starters, you might want to refer to the aforementioned section to make an informed decision. 

Frequently Asked Questions

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.