Open Ended vs Close Ended Funds 2022 – Open & Close Ended Funds Difference
What are open-ended funds?
An open-ended fund is always open for subscription. An investor can apply at the time of a new fund offering (NFO) or any time after that. An investor can invest a lump sum or through a systematic investment plan (SIP).
The fund manager invests the money on behalf of investors as per the scheme objectives. The investors are allotted units in proportion to their investment. The scheme’s net asset value (NAV) is declared at the end of every trading day.
An investor’s profit or loss depends on the movement of the NAV, which in turn depends on the valuation of the securities held in the scheme portfolio. The investor can redeem their units with the fund house at any time.
Advantages of open-ended schemes
Some of the advantages of open-ended schemes include:
- Always open for subscription: An open end fund is always open for investors for a subscription.
- SIP mode of investment: An investor can invest in an open-ended scheme through a systematic investment plan (SIP). It is a convenient way of investment for most retail investors wherein they can invest small amounts every month. They can also increase their SIP amount by 5-10% every year in line with the increase in their annual income.
- Can be redeemed at any time: An investor can approach the fund house at any time with a redemption request. The redemption is done at the net asset value (NAV). The redemption proceeds are credited to the investor’s bank account.
- Scheme track record: As the scheme is always open for subscription, you can wait and watch the scheme's performance before investing. You can study the scheme track record for some time and decide accordingly whether you would like to invest.
What are close-ended funds?
A close-ended scheme is open for subscription to investors only during the New Fund Offering (NFO). The scheme has a fixed tenure which is usually three to seven years. All investors wanting to invest have to invest in a lump sum during the NFO.
Once the NFO ends, the fund manager invests the collected money on behalf of investors as per the scheme objectives. All investors are allotted scheme units in proportion to their investment. The scheme’s net asset value is declared regularly. The NAV depends on the valuation of the securities held in the scheme portfolio.
The scheme units are listed on the stock exchange. Existing investors wanting to exit can sell their units to another investor through the stock exchange. There can be liquidity issues for selling units through the stock exchange. Depending on the demand and supply, the units may trade at NAV, premium, or discount on the stock exchange.
What are the advantages of a close-ended scheme?
One of the biggest advantages of a close-ended scheme is that it has the potential to provide good returns to investors. A close-ended fund manager doesn't face redemption pressure during the scheme's tenure. Hence, they can take long-term bets and stay invested till the investment theme plays out and creates maximum wealth for investors.
Difference between open ended and closed ended funds
Some of the differences between open ended and close ended mutual funds include:
|Feature||Open-ended fund||Close-ended fund|
|Nature of scheme||An open-ended fund is always open for subscription. An investor can invest at the time of NFO or anytime later. The scheme is ongoing with no fixed tenure.||A close-ended fund is open for subscription only at the time of New Fund Offering (NFO). After the NFO, an investor can buy units from another investor through the stock exchange. The scheme has a fixed tenure.|
|Mode of investment||Investors can invest in a lump sum or start a systematic investment plan (SIP).||Investors can invest only in a lump sum. They can't do a systematic investment plan (SIP).|
|Trading of units||Since the scheme units are not listed on the stock exchange, investors can’t trade them.||As the scheme units are listed on the stock exchange, investors can trade them. Investors can buy units at net asset value (NAV), premium, or discount.|
|Redemption||Investors can redeem the units with the AMC at any time.||Investors can redeem units with the AMC only on the scheme's maturity.|
|Scheme units and assets under management (AUM)||The scheme keeps accepting new subscription requests from investors and keeps issuing new units all the time. Hence, the number of scheme units and assets under management keeps increasing.||The scheme units are allotted after the NFO. After that, the scheme units remain constant as no new units are issued. The AUM moves up and down depending on the value/NAV of the existing units.|
|Track record before investing||As an open-ended scheme accepts subscriptions on an ongoing basis, you can check the past track record of the scheme before investing.||As you can invest in a close-ended scheme only at the time of the NFO, you cannot check the past track record of the scheme before investing.|
|Minimum investment amount||The minimum investment amount is usually Rs. 500 or so.||The minimum investment amount is usually Rs. 5,000 or so.|
|Rupee cost averaging||You can make regular purchases of the scheme units and average your purchase cost.||You cannot make regular purchases of the scheme units, so averaging the purchase cost is not possible.|
|Fund manager control and flexibility||The fund manager has limited control as there can be continuous subscriptions and redemptions. So, they can invest with limited flexibility.||The fund manager has complete control as there is a one-time subscription and no pressure of redemptions till maturity. So, they can invest with full flexibility.|
Open-ended vs close-ended schemes: Which one is better?
How should you choose between an open-ended or close-ended scheme as an investor? It all depends on your investment requirements.
Who should choose a close-ended scheme?
As an investor, if you want to make a one-time lumpsum investment for a long tenure of say three to seven years, then you may consider investing in a close-ended scheme.
Who should choose an open-ended scheme?
As an investor, if you want to make a regular investment through the systematic investment plan (SIP) mode and want an open option for redemptions at any time, you may consider investing in an open-ended scheme.
Since most retail investors prefer to invest a small amount regularly through the SIP mode, open-ended schemes have the edge over close-ended schemes.