Mutual funds can be described as a collective investment avenue. Investing in a mutual fund is like becoming a part-owner in the portfolio of investment. Based on the structure, a mutual fund is classified as open-ended and closed-ended. Open-ended funds, as the name suggests, are the type of mutual funds, wherein the investor can enter and exit anytime. On the other hand, closed-ended funds are the ones which the investor can buy during the IPO or from the stock exchange after they are quoted.
In the open-ended scheme, the capital fund is unlimited and redemption period is not defined. Conversely, in the closed-ended scheme, the life is limited, at the expiry of which the fund liquidates. Take a read of this article excerpt, in which we have explained all the important differences between open-ended and closed-ended mutual funds.
Content: Open-ended Funds Vs Closed-ended Funds
|Basis for Comparison||Open-Ended Funds||Closed-Ended Funds|
|Meaning||Open-ended funds can be understood as the schemes that offer new units to the investors on a continuous basis.||Closed-ended funds are the mutual funds, which offer new units to investors for a limited period only.|
|Subscription||These funds are available throughout the year for subscription.||These funds are available only during specified days for subscription.|
|Maturity||There is no fixed maturity.||Fixed maturity period, i.e. 3 to 5 years.|
|Liquidity provider||Funds itself||Stock market|
|Listing||No listing on stock exchange, transactions are performed directly through fund.||Listed on a recognized stock exchange for trading.|
|Transactions||Executed at the end of the day.||Executed in real time.|
|Determination of price||Price can be determined by dividing NAV from shares outstanding.||Price is determined by supply and demand.|
|Selling price||Net Asset Value (NAV) plus load, if any.||Premium or discount to Net Asset Value (NAV).|
Definition of Open-ended Funds
An open-ended mutual fund is one that does have any limitation on the number of shares issued by the fund. It is continuously available for subscription and repurchase. It is perpetual in nature, in the sense that once the fund is introduced, it continues to exist, without the maturity period.
In the open-ended mutual fund, the shares can be bought or redeemed anytime during its life and so the number of units goes up and down, on a regular basis. The dealing takes place at the NAV, i.e. net asset value, calculated periodically. The NAV fluctuates, on account of the performance of underlying securities.
Most of the mutual funds are open-ended, that provides investors with a better investment avenue, wherein shares are bought and redeemed any time. The investors can purchase the shares directly from the funds, instead of buying it from the exchange.
Definition of Closed-ended Funds
The closed-ended mutual fund is a pooled investment vehicle, having a fixed maturity period, i.e. 3 to 5 years, which are listed on a recognized exchange. In this type of fund, the investor can invest their money directly in the scheme, during the Initial Public Offering, after that the units of the plan can be traded in the secondary market, where they are quoted.
The price of the underlying financial asset is determined by the demand and supply forces, the expectation of unit holders and so on, existing in the stock market. Generally, the price per share differs from the net asset value of the investment (calculated weekly), which is termed as premium or discount to NAV.
Key Differences Between Open-ended and Closed-ended Funds
The difference between open-ended and closed-ended funds can be drawn clearly on the following grounds:
- Open-ended funds refer to the mutual fund, in which the investor is allowed to buy shares anytime, even after the closure of the NFO, i.e. New Fund Offer. As opposed, the shares of closed-ended funds can be bought only during the New Fund Offer, i.e. after the NFO is over the investor is not allowed to invest.
- The subscription of the open-ended mutual fund remains open on a regular basis, i.e. it accepts funds from the public by providing its units. Conversely, the subscription of closed-ended schemes is open for a short period only, i.e. from one to three months only.
- In the open-ended mutual fund, there is no fixed maturity period, whereas there is a definite maturity period, in the case of closed-ended funds.
- The liquidity is provided by the fund itself, in the open-ended scheme. As against this, in the closed-ended scheme, the stock market provides liquidity.
- In an open-ended fund, the corpus is variable because of continuous buying and redemption. On the other hand, the corpus is fixed because no new units are offered for sale, beyond the limit specified.
- The shares of the open-ended mutual fund are not listed on an exchange, rather the transactions are performed directly through the fund. In contrast, the shares of the closed-ended mutual fund are listed on the secondary market.
- In open-ended scheme, the transactions are executed on daily basis, while in the closed-ended scheme the transactions are executed on real time basis.
- In the open-ended fund, prices are determined by dividing NAV from shares outstanding. Unlike, in the closed-ended fund price per share is ascertained by supply and demand.
- The selling price of the underlying security in the open-ended fund is Net Asset Value (NAV) plus load if any. On the contrary, in the closed-ended fund, the selling price of the underlying asset premium or discount to Net Asset Value (NAV).
One of the major disadvantages of the closed ended funds is that it does not allow the investors to withdraw the amount invested in the fund when they desire. In contrast, the open-ended funds offer flexibility to the investors in this regard as they can withdraw money on a continuous basis, under the repurchase agreement.