When exploring mutual funds, you'll come across two main types: close ended and open ended funds. Both options offer unique features, giving investors flexibility based on their preferences. Whether you're looking for a long-term investment or something more structured, understanding the difference between closed end funds and open end funds can help you make informed decisions.
It is also important to choose the right kind of fund that matches your goals. With a clear understanding of these mutual fund types, your strategy for online trading becomes more effective, allowing you to diversify and grow your investments with ease.
What do you mean by open ended mutual funds?
An open ended fund is that type of mutual fund that has no limits on the buying or selling of shares. These funds are available throughout the year for subscription and don't have a set maturity date. The only exception is ELSS funds, which have a lock-in period of three years from the date of investment.
Shares in an open end fund are largely bought and then sold on the basis of their net asset value. This NAV is calculated at the end of each trading day, reflecting the value of the fund's underlying securities. Unlike other funds, open end funds are not traded on the stock exchange. Instead, they are first bought and then sold directly through the fund. This makes them more flexible for investing in the stock market, as investors can easily enter or exit the fund. Advantages of open ended mutual funds include:
What are closed ended mutual funds?
A closed ended fund is a type of equity or debt mutual fund where the fund house issues a set number of units during the New Fund Offer (NFO) period. After the NFO closes, investors cannot buy or redeem units until the fund's maturity. These funds are listed on BSE and NSE in India and traded like shares. The price at which they trade can differ from the fund's Net Asset Value (NAV), depending on the demand and supply of the actual units in the market.
Closed ended funds offer the fund manager more flexibility to meet the investment goals without concerns about inflows and outflows. The fixed structure allows them to manage investments with a long-term focus. This type of fund 'closes' after the initial offering and remains closed to new investments until the maturity date.
Understanding this structure helps investors make informed decisions when investing in the stock market or participating in online trading. Here are the key advantages of closed ended mutual funds:
What are the primary factors differentiating the two?
To compare the features of open ended and closed ended mutual funds and settle the debate of closed ended vs open ended mutual funds, let's look at how these two types of funds differ across various key parameters:
Open ended funds offer flexibility as they can be bought or redeemed at any time. However, ELSS (Equity Linked Savings Scheme) funds come with a lock-in of three years. Closed ended funds, on the other hand, can only be purchased during the offer period and redeemed after the lock-in period.
Open ended funds are highly liquid, allowing investors to redeem units easily. Closed ended funds have limited liquidity since redemption is restricted until the lock-in period ends.
Open ended funds have a flexible size, adjusting based on investor demand. In contrast, closed ended funds have a fixed size determined at the time of launch.
For open ended funds, you can invest through SIPs (Systematic Investment Plans) or in lump sums. Closed ended funds require lump sum investments during the offer period only.
Open ended funds come with a track record, allowing investors to evaluate past performance. Close ended funds don't have a performance history since they are only available during the NFO (New Fund Offer) period.
Open ended funds' price is based on their Net Asset Value (NAV), while the price of closed ended funds depends on market demand and supply.
Open ended funds can be started with as little as ₹1,000. Closed ended funds typically require a minimum investment of ₹5,000.
Why should one invest wisely?
Choosing the right mutual fund is important for anyone looking to achieve their financial goals. Whether you prefer the flexibility of open ended funds or the structured nature of closed ended funds, understanding the differences between them is essential.
The right mutual fund can help you optimise your returns while aligning with your investment strategy. Additionally, investing in the stock market or exploring mutual funds through a reliable online trading platform ensures that your investments are both secure and convenient.
By selecting the appropriate fund and platform, you not only enhance your portfolio but also gain better control over your financial future. Always make informed choices to ensure long-term success in your investment journey.
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