A mutual fund is a pooled investment vehicle wherein a fund manager collects money from different investors, be it individuals or institutions. This amount is then invested in stocks, bonds, and other assets according to the investment objective of the fund. Mutual fund investments are categorized in to open-end and closed-end mutual funds based on their trade, purchase, and investment structure. All mutual funds are established by a New Fund Offer (NFO), which allows a firm to raise capital for purchasing securities- be it shares or bonds.
Open-end mutual funds
Open-end mutual funds are open to investments and redemption in perpetuity, unless specified otherwise. These funds allow investors to enter and exit in conformity with the defined rules any time.
An open-end fund generally starts after the NFO period ends, and its units can be bought and sold at a net asset value (NAV), which is set by the asset management company. The NAV is calculated at the end of each business day, and is determined by the value of the fund’s underlying securities or assets. Moreover, the fund house can also issue more units as new investors join the fund.
Closed-end mutual funds
Closed-end mutual funds also start with an NFO, but the number of units in a particular fund are limited. Once the units are allotted to the NFO investors, they can trade these units in the secondary market through a brokerage.
Just like any other mutual fund schemes, the value of a close-ended fund also depends on the NAV. However, for a new investor or for an existing investor looking to enter or exit a closed-end mutual fund after the NFO period, the price is determined basis the demand and supply in the secondary market. These fund’s units sell either at a premium or at a discount to the NAV. These funds also offer an avenue for liquidity as they offer to buy back the units apart from listing them on exchange. For the same, the Securities and Exchange Board of India also ensures regulations to assure at least one out of the two avenues to investors for entering or exiting.
Open-end vs closed-end mutual funds – A quick summary
|Parameters||Open-end mutual funds||Closed-end mutual funds|
|Listing||These are not listed on exchanges||These are listed on exchanges|
|Liquidity||Highly liquid, can be redeemed anytime unless you are investing in Equity Linked Saving Scheme (ELSS)||Tend to be less liquid than open-end funds and can be more volatile|
|Units offered||They offer new units to an investor continuously||They offer new units to an investor for a restricted period|
|Maturity period||There is no fixed maturity period||There is a fixed maturity period|
|Price determination||Units are sold at NAV||Price of units is based on demand and supply|
Decisions on investment instruments should be taken based on your financial goals and appetite for risk. And only after factoring in all aspects should you decide if you want to invest in open-end or closed-end mutual funds. To make this decision making process easy, it is advisable to explore your options through a financial expert who can suggest plans that aligned with your investor profile.
Reach out to one today for expert advice on long-term wealth creation.