Mutual funds in India are the preferable way of investing for retail investors. However, there is a wide variety of schemes available, due to which it becomes difficult to understand which one is more suitable for you.
Mutual funds are broadly categorised into two categories, open-ended funds and closed-ended. Further division and subdivision are made as per the other bases. Before understanding the differentiation, let's dive deep into the meaning of both.
What are open-ended mutual funds?
Open-ended funds can invest in a variety of assets, such as stocks, bonds, or real estate. They are typically managed by professional fund managers who make investment decisions on behalf of the investors in the fund. The value of the fund is determined by the performance of its underlying investments.
It allows you to buy and sell shares at any time, and the price of the shares is determined by the net asset value (NAV) of the underlying securities in the portfolio. Open-ended mutual funds are the most common and preferable type of mutual fund in India.
What are closed-ended mutual funds?
On the other hand, closed-ended funds are basically a vehicle to collect funds from the investor to start initial investments of an AMC, which refers to an NFO. As an IPO, NFO also has a lock-in period before which you cannot make an exit from an investment.
Additionally, closed-ended funds are traded on an exchange, their price can fluctuate based on supply and demand, and investors may be able to buy or sell shares at a price that is different from the fund's NAV.
Let's understand the basic differences between them so you make informed investment decisions.
|Particulars||Open-ended funds||Closed-ended funds|
|Structure||Open-ended funds can issue an unlimited number of shares to investors on an ongoing basis.||Closed-ended funds have a fixed number of shares that are sold during their initial public offering (IPO).|
|Trading||Open-ended funds are traded at the net asset value (NAV) per share, which is calculated daily based on the current value of the fund's underlying assets.||Shares of closed-ended funds are traded on stock exchanges, similar to stocks, and their price is determined by supply and demand.|
|Liquidity||Open-ended funds can be redeemed by investors at any time at their NAV price, making them more liquid.||Redemption of securities can be done only after the lock-in period is over.|
|Historical data||As you invest in existing schemes, the historical performance of AMC is available.||As you are investing in an NFO, there is a lack of availability of the historical performance of the scheme.|
|Rupee cost averaging||Investing in SIPs allows you to add more units when markets are at the same amount of SIP.||There would be no facility as such is available.|
Both have their own advantages and disadvantages. Making an investment decision totally depends on your risk tolerance, financial objectives, and understanding of securities type. For example, if you want to start a SIP, it would be better to invest in open-ended funds, as the minimum amount of investment is lesser than in closed-ended funds.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com