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Open-Ended and Close-Ended Mutual Funds

The primary difference between close and open ended mutual funds is flexibility and the ease of sale and purchase of fund units.

What are Close Ended Mutual Funds?

Close ended mutual funds are a type of mutual fund which assign a fixed number of units for sale that are traded in the stock market. Units of closed-ended funds are purchased and sold through brokers, they cannot be purchased anytime by every investor. Also, close ended funds are issued only via New Fund Offer. The purchase period is limited to a few specific days. Apart from having a fixed maturity period, close ended funds are usually traded at discounts to their NAV.

Advantages of Close Ended Mutual Funds

1. Stability - Close ended mutual funds offer stability; the investors can redeem their funds only post the fixed maturity period. This feature enables the fund manager to develop a robust investment strategy as he/she need not worry about the inflows and outflows in the case of stable asset bases.

2. Market Price - Since closed ended mutual funds trade on the stock market, investors can purchase/sell units based on real-time prices. In addition, investors can also utilize different stock trading strategies like market/limit orders and margin trading.

3. Flexibility - Close-ended mutual funds offer liquidity and flexibility to an investor. Investors have the option of trading their close ended mutual funds on the stock market. The trading price can be below or above the NAV of the fund during the time of purchase.

Open Ended Mutual Funds

Open ended mutual funds are mutual funds which do not have a limit as to how many units they can issue. These funds are bought/sold on demand from the stock market on the price of their NAV. Investors buy units directly from a fund house and these funds do not have a fixed maturity value.

Advantages of Open Ended Mutual Funds

1. Liquidity - Open ended mutual funds offer high liquidity; an investor can redeem the units as per their convenience. In addition, open ended funds also provide the flexibility for redemption at the prevailing Net Asset Value (NAV).

2. Track Record - In case of an open-ended mutual fund, you can view the historical performance of the fund on a regular basis. This is a big advantage in comparison to investing in a close-ended mutual fund.

3. Systematic Investment Fund - Open ended mutual funds offer multiple modes of investment options - Systematic Investment Plan, Systematic Withdrawal Plan, Systematic Transfer Plan, etc. Therefore, open-ended funds are a suitable investment option for a large number of salaried class of investors.

Conclusion There is not enough evidence to state that open ended mutual funds are better/worse than close ended mutual funds or vice versa. The performance of the mutual fund depends on the fund category, fund management, and investment style. Close ended mutual funds are suitable for beginners who have minimal knowledge of the market and seek annualised returns of 12%-15%. Close ended mutual funds are suitable for investors looking for a fixed maturity period.