Open-ended vs closed-ended Funds: Difference & Which One to Choose?

Mutual fund and assets management companies (AMCs) sell their investment fund schemes through various modes of investments. You can choose to invest in such funds as per your ease and flexibility. These funds are available with the flexibility to invest in popular funds called open-ended funds and closed-ended funds with different investing criteria.

Mutual fund houses and asset management companies sell these funds through units known as net asset value (NAV) with specific prices. The price of NAV keeps fluctuating as per the change in the price of the assets included in the funds like stocks, bonds or other investable financial instruments. Let’s find out the difference between open-ended and closed funds.

What is an Open Ended Fund?

Open-ended funds are investing schemes that you can buy and sell anytime during trading days. The open-ended funds are always open to invest and redeem or sell as per the flexibility of the investor, as there is no restriction on time and amount of investment. You can buy the NAV anytime during market hours, and there is no fixed date of maturity or lock-in period.

What is a Closed Ended Fund?

Closed ended funds are the investment schemes offered by mutual fund houses and AMCs with the restriction of buying and selling the NAV units or entering and exiting from the funds. When closed ended funds are open only then can you invest in such funds and can redeem the investment only after the maturity of the investment scheme is completed or when the lock-in period ends.

Open Ended and Closed Ended Funds Difference

The key difference between open ended and closed ended funds is the criteria to enter and exit into the fund. In open ended funds, you can enter anytime during the business days, while to spend on closed ended funds you can invest when the new fund offer period is open.

Similarly, you can exit or sell the units of NAVs of open ended funds anytime during the trading hours, but in closed ended funds, you have to wait till the date of maturity of the scheme. However, there are more such differences let’s find out.

Open vs Closed Ended Funds: Difference

Aspects	Open Ended Funds	Closed Ended Funds
Definition	Open ended schemes are offered through different units (NAVs) and open all the time for the investors to invest at any time during the business days.	Closed ended schemes are offered from time to time for specific times and every time new units are offered for a limited period of investment.
Funds Unit Price	In open ended funds, each unit price is determined by dividing the NAV by the total number of outstanding shares in the market.	While the price of the units of funds in the closed ended funds is determined as per the demand and supply of the fund in the market.
Mode of Investment	To invest in open ended funds you can buy SIPs or can also invest through lump sum amounts.	To invest in closed ended funds you have the option to invest only through lump sum amount.
Amount of Investment	In open ended funds you can start investing even with smaller amounts as much as Rs 500.	In closed ended funds to invest you can start spending from Rs 5000 or more onwards.
Corpus of Funds	The corpus of funds in open ended funds can be variable as per the mutual fund houses.	Closed ended funds have a fixed amount of corpus defined by the AMCs or fund houses.
Lock-in-Period	In open ended funds, you can enter and exit anytime as per your ease.	In closed ended funds, there is a lock-in period of 3 to 5 years or more.
Maturity Criteria	There is no fixed maturity date in the open ended funds you can invest or exit anytime.	In closed ended funds, the date of maturity is fixed generally from 3 to 5 years.
Liquidity Level	Open ended funds are highly liquid from the trading perspective.	The liquidity to redeem the funds in closed ended funds is very limited.
Risk Tolerance	Open ended funds are suitable for risk-averse investors, as they can be liquidated anytime as per the market movement or performance of the fund.	In closed ended funds, you have to wait for long years and there is a lock-in period making these types of funds suitable for high-risk tolerance investors.
Tax Benefits	Open ended funds allow the flexibility to exit anytime, and also provides tax benefits under Section 80C of the Income Tax Act but for the long term.	Closed ended funds are also eligible for the tax benefit but there is a lock-in-period that should be considered at the time of investment to get such benefits.
Fun Corpus	The corpus of open ended funds keeps fluctuating, as the unlimited number of shares are purchased and sold by the fund managers.	In closed ended funds, usually a fixed number of shares from IPO and secondary market is purchased and sold after a certain period.

 

Pros and Cons of Open & Closed Ended Funds

Advantages

Open Ended Funds: Open ended funds are highly liquid compared to closed ended funds, hence you can buy or sell the units in open ended funds anytime. You can also check the historical performance of open ended funds and you can choose the SIP to invest in such open ended funds providing the opportunity and the benefit of diversifying your investment.

Closed Ended Funds: Closed ended funds are safer, as it is less volatile and provide stability in the investment. Closed ended funds are suitable for investors looking to invest the lump-sum amount with a medium to long-term investment perspective.

Disadvantages  

Open Ended Funds: Owing to the flexibility of investment, open ended funds are exposed to a high risk of diversification and highly diversifying your fund increases the market risks. And due to the reshuffling of portfolio investment, there is risk of dilution of your investment.

Closed Ended Funds: In closed ended funds, you need a high amount of funds in lump-sum to invest in the fund. The liquidity, investing, or exiting from the funds are much less in the closed ended funds. And to invest in the closed ended funds you need a huge amount of investment.

Open Ended vs Closed Ended Funds: Which One is Suitable for You?

Open ended funds could be a better option for people who want to invest with the motive of liquidating their investment anytime whenever required. While closed ended funds are suitable for people having the patience to hold their investment for a long period.

In open ended funds, you can start investing with smaller amounts as much as Rs 500, while in closed ended funds you should have at least Rs 5000 or more to start investing in such funds. In open ended funds, you can invest through SIP at regular intervals, while in closed funds you have to invest a lump-sum amount at the time of investment.

Conclusion

Open ended funds are suitable for those who want to invest with the liquidity option to exit from the scheme anytime. While closed ended funds are more aligned for the investors having enough funds to invest at a time with the risk tolerance to hold their investment for 3 to 5 years.

While a closed ended fund can give you lucrative returns as it can absorb the various market conditions and can give you the best returns in the long term. However, you can choose the funds as per your investment goals, risk tolerance and funds availability.

• Author: Religare Broking
• Last Updated: November 26, 2024