Open-ended and closed-ended funds are two popular investment options , each with distinct structures and trading mechanisms. In an open-ended fund, units are created and redeemed as investors buy and sell, with the price based on the daily Net Asset Value (NAV). This structure allows for flexibility, as investors can easily enter or exit the fund. On the other hand, closed-ended funds issue a fixed number of units that are traded on stock exchanges.
The price of these units is determined by market supply and demand, which can cause them to fluctuate above or below the NAV. As a result, closed-ended funds are more susceptible to market volatility.
In this blog, we will explore the key differences between open-ended fund and closed-ended fund, their types, and how each can fit into an investor’s strategy.
Open Ended Funds Meaning
As the name suggests, open-ended funds are mutual funds that allow investors to buy or sell units at any time. This fund represents the most common form of investment of mutual funds in India.
One of the key features of open-ended funds is that there is no upper limit on the Assets Under Management (AUM), allowing the fund to accommodate an unlimited number of investors. This flexibility makes it an attractive option for many.
The Net Asset Value (NAV) of the fund is calculated daily, based on the current value of the underlying securities, ensuring that investors can buy or sell at a fair price in real-time.
What are the Different Types of Open-Ended Funds?
Open-ended funds are particularly suitable for equity funds, debt funds, and liquidity funds. These funds are categorised based on their asset class, specialisation, and structure. When classified by asset class, open-ended mutual funds fall into the following categories:
- Large-cap fund
- Small cap fund
- Multi cap fund
- Large and mid-cap fund
- Mid-cap fund
- Contra fund
- Value fund
- Thematic or Sectoral fund
- Equity-linked saving scheme
Considering the speciality, open-ended funds are divided into the following categories:
- Retirement funds
- Fund of funds
- Children funds
- Index funds
- Asset allocation funds
- Commodity funds or Hedge funds
Closed-Ended Funds Meaning
A closed-end fund is an investment option, either equity or debt-based, in which a fixed number of shares are issued by the fund at the time of its launch. After the New Fund Offer (NFO) period concludes, investors can no longer buy or redeem units directly from the fund. Instead, the units are traded on the stock exchange, similar to individual stocks, and typically have a set maturity period.
The Net Asset Value (NAV) of a closed-end fund reflects its true value, but the market price of the units can fluctuate above or below the NAV, driven by market forces such as supply and demand. Once the initial offering period ends, the fund “closes” and remains closed until it matures, giving fund managers the flexibility to implement long-term investment strategies without the pressure of managing daily inflows and outflows of capital.
What are the Different Types of Closed Ended Funds?
There are two main different types of closed-ended funds – bonds and equities. Let us explore these two types in detail below:
- Bond Closed-End Funds: These funds predominantly invest in bonds, and while they offer steady income potential, they come with inherent risks. The two primary risks are market risk and credit risk. Market risk refers to the potential for interest rates to rise, which can decrease the value of the bonds within the fund.
Generally, bond funds with longer durations are more sensitive to interest rate changes, leading to greater fluctuations in the fund’s net asset value (NAV). Credit risk, on the other hand, involves the possibility of issuers defaulting on their debt obligations, which can also negatively impact the fund’s performance. - Equity Closed-End Funds: These funds invest primarily in stocks, and as with any equity-based investment, there is a risk that the fund’s NAV and market price may decline if the value of the underlying stocks drops.
The value of a specific stock within the fund can be influenced by several factors. These include the financial health, performance of the company issuing the stock, industry-related developments, and broader market and economic conditions. Fluctuations in the stock market can thus significantly impact the overall value of the fund.
Distinction Between Open-Ended Funds and Closed-Ended Funds
Here are the key differences between open-ended and closed-ended funds:
| Features | Open-ended Funds | Closed-ended Funds |
| Liquidity | These funds are highly liquid. Thus, redeeming them at any moment is possible. | There is a particular lock-in period for closed-ended funds. Thus, it provides less liquidity. |
| Net Assets Value (NAV) | Investors can purchase units of open-ended funds considering the current NAV. | Closed-ended funds have different NAVs. |
| Buying, Selling and Trading | Open-ended funds are not eligible for trading on stock exchanges | Closed-ended funds can be traded on stock exchanges |
| Subscription | The subscription status of an open-ended mutual fund is active daily which means it collects cash from the public through issuance of units. | Closed-ended funds are however available for a specific and limited period. |
| Corpus | Because of ongoing purchasing and redemption power, the corpus of open-ended funds keeps on changing. | Because no units can be issued for sale, the corpus for closed-ended funds remains fixed and stable. |
Closed-Ended vs Open-Ended Funds – Which is Better?
Choosing between closed-ended funds and open-ended funds depends on individual needs, preferences and investment goals. If you can afford to invest for a prolonged period, going for close-ended funds that provide you stability with high returns through compounding is a wise option. On the other hand, if you prefer liquidity, open-ended funds will be a viable option.
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