Difference Between Close-Ended and Open-Ended Funds

We know that mutual funds are the best investment option for investors who are seeking diversification, professional management, and easy access to returns. When talking about its structure, mutual funds are classified into two categories, open-ended and close-ended funds.   

It is important to understand the difference between close-ended and open-ended funds before you make investment decisions. In this blog we explore both fund types, their advantages and disadvantages, and how they differ from each other in detail.  

What are Open-Ended Mutual Funds?

Open-ended mutual funds are one of the schemes of mutual funds that allow investors to enter or exit from the fund at any time. It doesn’t have fixed maturity periods, and the unit prices are based on the daily NAV (Net Asset Value).  

The term is very simple; if you are choosing an open-ended fund, you can easily enter or exit from the fund anytime. One of the most popular investment plans, SIP (Systematic Investment Plans), is offered under open-ended schemes.  

Pros and Cons of Open-Ended Funds

Pros	Cons
Enter or exit anytime	The value of funds will change depending on the market conditions.
Daily NAV (Net Asset Value) disclosure will help to easily track fund value	Some funds ask charges for early withdrawals
Small investment spread across various securities	Frequent buying and selling processes will lead to transaction costs
Systematic Investment Plans (SIP) are available for this fund	Returns are not guaranteed

What are Close-Ended Mutual Funds?

Close-ended mutual funds have a fixed maturity period; it is usually 3 to 5 years, and it’s open for subscription only during the NFO (New Fund Offering) period. If the NFO period is over, the fund didn’t accept any new investment, and the investors cannot redeem units directly.  

To offer liquidity to the investors, closed-ended funds are listed on stock exchanges that will help them to trade units like stock.

Pros and Cons of Close-Ended Funds

Pros	Cons
Fund managers can execute long-term strategies	Investors can’t redeem their units until maturity period ends
Prevent impulsive decisions	Only lump sum option
Fund managers can deploy strategies to get better returns	Close-ended funds didn’t offer the data to analyze the performance with different market situations
Selling on the stock exchange at prices that are determined by the demand and units of the scheme	If liquidity is low, challenges will arise while selling units.

Difference between Close End Funds and Open-End Funds

The difference between close-ended and open-ended mutual funds can help you choose the right one for your investment strategy.

Feature	Open-Ended Funds	Close-Ended Funds
Subscription Period	Any time after launch	Only during NFO
Liquidity	High and investors can redeem anytime	Limited and investors must wait or sell on exchange
NAV Pricing	Based on daily NAV	Trades on exchange price (may differ from NAV)
Investment Mode	SIP & lump sum available	Only lump sum investment
Fund Size	Changes with inflow/outflow	Fixed
Lock-in Period	No lock-in	Locked till maturity
Portfolio Management	May change due to frequent redemptions	Stable and long-term approach
Suitability Mismatch	Not ideal for investors who have long-term vision	Not ideal for investors who need flexibility, or cash flow access
Reach & Distribution	Readily available through online platforms	Limited visibility post-NFO
Analysis	Analyse and compare similar schemes easily	Analyse and comparison not possible

Wrap Up

Both close-ended and open-ended mutual funds have their unique advantages and disadvantages. So, we won’t be able to tell if one is better than another. Open-ended funds are suitable for investors who are seeking liquidity and flexibility, while close-ended funds are fit for investors who can stay invested for the entire maturity period.  

If you want to choose the best one for your financial goals, you must analyze your goals, investment horizon, and mainly your risk tolerance. So, are you ready to balance your portfolio by including better funds? Join Navia Markets and see the changes now! 

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