What are Open Ended and Closed Ended Mutual Funds

Open Ended and Closed Ended Mutual Funds

Mutual funds have become an integral part of any investment portfolio. Open ended and closed ended mutual funds is a trust that pools the savings of a number of investors who share a common financial goal. Close ended funds are fund manager friendly and Open ended Schemes are more investor friendly.

As a layman, one gets quite confused when it comes to how mutual funds are categorized, as there are various ways to categorize mutual funds-

On the Basis of Their Investment and Fund Style

  • Growth Funds, Value funds, Contra Funds, etc

On the Basis of Asset Class

  • There are equity diversified funds, sectoral funds, balanced funds, short term funds, gilt funds, debt funds. etc

On the Basis of Market Capitalisation

  • There are large cap funds, mid cap funds, small cap funds, micro cap funds.

There is yet an another way to categorise mutual funds- Open Ended mutual funds and closed ended mutual funds.

What are Open Ended Mutual Funds?

Open ended mutual funds are more common among investors and financial advisors as compared to close ended mutual funds where the lock in period is there.

In open ended mutual funds, the fund manager continuously buys and sells securities looking at the market conditions. To put it in a different way – new units are created when there is more demand as compared to supply and existing units or securities are sold when there are more redemption pressures

Advantages of Open Ended Mutual Funds

You get More Choices:

If you are trying to find the top 10 mutual funds – you probably will have all 10 “open ended mutual funds” in the top 10 mutual funds category. So, choosing an open ended mutual fund scores over closed ended mutual funds when it comes to selection of a good fund.

Example: HDFC Top 200 Fund, Reliance Growth Fund, ICICI Discovery Fund are among the top rated mutual funds and they all are open ended mutual funds

You can Buy and Sell Them Anytime:

Investors prefer to avoid any restrictions when it comes to investing your money. Open ended mutual funds can be sold anytime during the year and are also open to investment throughout the year which offers flexibility to mutual fund investors

If you have received a bonus of Rs 1,00,000 from your company and you want to invest in a good mutual fund. But your desired closed ended mutual fund may not be open to investment at that point of time. However open ended mutual fund are open for inflows throughout the year.

What are Closed Ended Mutual Funds?

Closed ended schemes are schemes launched by fund houses where an investor can invest only during the new fund offer period.

No further additions or withdrawals are accepted over a certain period of time. However once this period (restricted period) is over, one can again invest in the given closed ended scheme.

Advantages of Closed Ended Funds

Fund Manager Friendly:

Close ended funds are fund manager friendly. Open ended Schemes are more investor friendly as it gives the choice to the investor to withdraw their money at any time. Whereas this option is not available to investors holding closed ended schemes. Therefore this offers benefit to the fund manager.

The fund manager is always sure that a certain amount of money is always available to manage. There won’t be any addition or withdrawal during the given period and thus is able to manage the funds better

If the fund manager knows that he has a fixed corpus of 100 Crores to manage, he can have a fixed asset allocation in his mind of 100 Crores, otherwise daily additions and redemption pressures disturbs his portfolio asset allocation on a daily or weekly basis

You Still have An Exit Option:

Investors can transact the units of the scheme on the stock exchanges where the units are listed or other option is when an investor of closed ended scheme sells the units back to the fund house.

SEBI makes sure that investor can exercise atleast one of the two options of exit. Fund houses however are open to repurchase units of mutual funds at certain periodical intervals that may be every quarter or once in a year in some funds.

Conclusion – Open Ended and Closed Ended Mutual Funds

After studying both categories of mutual funds carefully, it is clear that open ended mutual funds are more investor friendly, as it gives investors flexibility. In open ended and closed ended mutual funds, open ended mutual funds are more common.

In open ended mutual funds, the fund house continuously buys and sells units from investors. The units of closed ended mutual funds are very similar to individual shares.

In open ended and closed ended mutual funds, open ended mutual funds do not have a fixed maturity period and are available  for subscription and redemption in an ongoing basis. Closed ended mutual funds are equity linked savings schemes where you cannot sell the units within the 3 year period.

To give some perspective, some of the open ended mutual funds like HDFC Growth fund have grown the investors’ money 10fold in the last decade. So it is always advisable to go with the trend and choose open ended mutual funds as a part of your portfolio compared to open ended and closed ended mutual funds.

About the Author

Vaibhav Sangli is an MBA Finance who loves to write on several topics including insurance and mutual funds and finding out different ways to earn and spend money.

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