November 22, 2023

Difference Between Open Ended And Close Ended Mutual Fund

Difference Between Open Ended And Close Ended Mutual Fund

The primary difference between open-ended and closed-end mutual funds is that an open-ended funds allow investors to buy and sell units directly at any time, offering high liquidity. In contrast, closed-end funds issue a fixed number of units that are traded on stock exchanges, providing limited liquidity and potentially exposing investors to market risks.

What is open ended and close ended mutual fund?

Open-ended mutual funds are investment vehicles that allow investors to buy and sell units directly at any time. The fund continuously issues new units and redeems existing ones based on investor demand. Closed-end mutual funds, on the other hand, issue a fixed number of units during an initial public offering (IPO) and are then traded on stock exchanges like individual stocks.

Let us take an example to understand this in a better way. Consider an open-ended equity fund “ABC Equity Fund” that allows investors to invest and redeem on any business day. The fund has a diversified portfolio of stocks and aims for long-term growth. On the other hand, “XYZ Closed-End Fund” had its IPO a year ago and is now traded on the stock exchange. It focuses on mid-cap stocks and has a maturity period of 5 years. While you can invest in “ABC Equity Fund” at any time, you can only buy “XYZ Closed-End Fund” from another investor willing to sell their units on the stock exchange.

Difference Between Open Ended And Close Ended Mutual Fund

The main difference between open-ended and closed-end mutual funds is that open-ended funds are transacted directly with the fund house, whereas closed-end funds are bought and sold on the stock exchange.

ParameterOpen-Ended FundsClosed-End Funds
LiquidityHigh liquidity as they can be bought and sold at any time directly from the fund.Limited liquidity as they are traded on stock exchanges.
StructureContinuously issues and redeems units based on demand.Fixed number of units issued during an IPO.
PricingPriced at the Net Asset Value (NAV) calculated at the end of each trading day.Priced based on market demand and supply, can trade at a premium or discount to NAV.
Management FeesGenerally have higher management fees due to continuous transactions.Usually have lower management fees.
Investment FlexibilityNo fixed maturity period, allowing for flexible investment and withdrawal.Have a fixed maturity date, limiting flexibility.
Dividend OptionOffers both dividend reinvestment and payout options.Usually only offers dividend payout options.
Tax TreatmentTreated as equity or debt funds for tax purposes based on underlying assets.Also treated based on the composition of underlying assets but may have different tax implications due to trading.

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Open Ended Vs Close Ended  – Quick Summary

  • Open-ended mutual funds allow investors to buy and sell units at any time directly from the fund, offering high liquidity and flexibility. Closed-end funds, however, have a fixed number of units and are traded on stock exchanges, limiting their liquidity.
  • Management fees are generally higher in open-ended funds due to the continuous issuance and redemption of units. Closed-end funds usually have lower fees.
  • Open-ended funds offer both dividend reinvestment and payout options, whereas closed-end funds usually only offer dividend payout options.
  • Open-ended funds are suitable for those looking for liquidity and the ability to invest or withdraw at any time. Closed-end funds are better for investors who are comfortable with a fixed investment period and are looking for specific investment strategies.
  • Invest in any type of mutual funds for free with Alice Blue. They provide a Margin Trade Funding facility, where you can use 4x margin to buy stocks i.e. you can buy stocks worth ₹ 10000 at just ₹ 2500. 

Open Ended Vs Close Ended   – FAQs  

1. What is the difference between an open mutual fund and closed mutual fund?

The main difference between open mutual fund and closed mutual fund is that an open-ended mutual funds can be bought and sold at any time directly from the fund, while closed-end funds are traded on stock exchanges.

2. Are open ended mutual funds good?

Open-ended mutual funds are generally considered good for investors who seek liquidity and the flexibility to invest or withdraw funds at any time. They are especially beneficial for long-term investors due to their diversified portfolios and professional management.

3. What is an example of an open ended mutual fund?

Here is an example of some of the best open-ended mutual funds:

Fund Name3-year Return (%)5-year Return (%)
Nippon India Small Cap Fund Direct- Growth44.75%26.94%
Quant Small Cap Fund Direct Plan-Growth45.91%30.42%
ICICI Prudential Smallcap Fund Direct Plan-Growth39.07%26.45%

4. Which mutual fund is best open or closed?

The “best” type of mutual fund depends on individual investment goals, risk tolerance, and liquidity needs. Open-ended funds offer more flexibility and are generally better for long-term investments. Closed-end funds may be suitable for investors looking for specific investment strategies and are comfortable with a fixed investment period.

5. Are closed-end mutual funds safe?

Closed-end mutual funds are generally as safe as the assets they invest in. However, they do carry market risk and may trade at a discount to their Net Asset Value (NAV). Investors should carefully consider the fund’s investment objective and risk factors before investing.

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