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Open-ended Funds Vs Close-ended Funds: Which Is Better?

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By Author: Swarali Chavan
Total Articles: 36
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Mutual funds are an excellent way to channelise your funds to achieve the desired financial goals. It is a pool of funds collected from like-minded investors which later gets invested in stocks, bonds, and other money market instruments. Mutual funds have different schemes for various investor needs. Apart from the common equity, debt, and hybrid funds, two additional mutual funds are popular: open-ended and close-ended mutual fund.

What is open-ended mutual fund? Mutual funds are launched through New Fund Offer (NFO). If you apply for the scheme during this period, you will receive the actual NFO rate. An open-ended fund is launched after the NFO ends. It allows investors to enter and exit anytime after the scheme gets launched.

What is a close-ended fund? It does not allow the entry and exit of investors after the NFO, at least till it matures. It is typically 3-4 years from the launch date.

What is the difference between open-ended and close-ended mutual funds?

Besides the subscription and redemption pointers, open-ended and close-ended mutual fund are a lot different:

• Close-ended funds do not offer the option of a Systematic Investment Plan (SIP). Similarly, since the redemption period are low, it does not follow the concept of Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP)
• Open-ended funds, on the other hand, do not have limitations on the numbers of units they can issue
• Close-ended mutual fund comes with inherent illiquidity. You could buy and sell its units in the market, but the liquidity in such funds are low
• When investors invest more money in the fund, more units get created. Also, when you redeem the units of the scheme, the units are removed in circulation
• Open-ended funds also allow SIPs, SWPs, and STPs unlike close-ended funds
What are the benefits of investing in close-ended funds?
• New strategies: Close-ended mutual fund enables the investors to invest in new policies that the current open-ended scheme may not provide
• Flexibility: You can choose when to invest in the market. So, even if the timing of the investment is not suitable, the fund gets launched at the market peak. The fund managers hold your funds and release them later. This way fund managers outperform the market
• Free from large flows: Open-ended funds are usually vulnerable to large inflows and outflows. Sudden outflows can make the fund manager sell his stocks at the lowest price. This is a loss for all the unitholders. Since close-ended mutual funds are locked-in until the tenure ends, the fund manager can focus on stock selection and monitoring. Investors can invest in close-ended funds through NFO
• Lock-in support: As the saying goes, ‘time in the market in crucial than timing the market.’ Most of the equity investors remain invested for only two years. This is because they cannot stay immune to market volatility and manias. However, the lock-in period for close-ended funds is a minimum of 3-4 years. It supports good investment habit
What are the benefits of open-ended mutual funds?
If you have understood what is open-ended mutual fund, then the following benefits should excite you:
• Liquidity: These funds offer high cash as investors can redeem these funds anytime. The funds are redeemed based on the Net Asset Value (NAV) for the day
• Track record: You can view the track record of an open-ended fund over different market cycles. This way investors can make an informed decision
• SIPs: Investors can make regular investments via SIPs. This is applicable concerning withdrawals and transfers as well through SWPs and STPs

Author bio:
Swarali Chavan is an investment banker by profession. She has spent considerable time researching on close-ended mutual fund. She has given the difference between open-ended and close-ended funds

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