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Understanding Open-Ended and Closed-Ended Mutual Funds

The fundamental difference between the 2 arises when we talk about flexibility and ease of sale.

Anshika Bajpai |

Updated:July 3, 2019, 6:33 PM IST
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Understanding Open-Ended and Closed-Ended Mutual Funds
The fundamental difference between the 2 arises when we talk about flexibility and ease of sale.

Mutual funds are differentiated using a lot of factors, one of which is categorising it structure wise. That divides mutual funds into 2 categories; Open-ended and closed-ended. The fundamental difference between the 2 arises when we talk about flexibility and ease of sale. Here’s what they are;

Open-ended Mutual Funds

These are the kind of mutual funds that do not trade in the open market. They don’t carry any limit as to how many units they can issue. Their NAV changes every day according to the market and the prices of the stocks and shares in the fund. These funds are traded on demand at their NAV which depends on its underlying securities and is estimated at the end of each day. If you want to buy its units you need to buy it directly from the fund. Open-ended fund investments are priced at the fair market value which is the closing market value of listed public securities. Also, these funds don’t have any fixed maturity period.

Why open-ended mutual funds are beneficial;

● They are highly liquid since you can redeem them anytime.

● The past performance of these assets is easily available, so you can easily make a well-informed decision of investing in these.

● It is a good option for salaried employees since these can initiate SIPs into the fund of your choice.

Closed-ended Mutual Funds

Closed-ended mutual funds issue a fixed number of units that are then traded in the stock market. These are launched through NFO and then bought or sold in the stock market like a regular stock. The value of this kind of a mutual fund is based on the NAV, but the actual price is decided by demand and supply since it is traded at a higher or lower price than its real value. So these funds can be bought and sold at premiums or discounts to their NAVs. The units are bought and sold through a broker and have a fixed maturity period.

Here are a few advantages of dealing in closed-ended mutual funds;

● The investors are not allowed to redeem closed-ended mutual funds except when the maturity date expires. Hence, it helps investors have a stable asset base which does not have any frequent redemptions. This helps the investor make a profitable investment strategy without having to worry about inflows and outflows.

● These funds trade in the market almost like equity shares. This gives an opportunity to the investors to buy or sell the units at the real-time price which can be above or below the NAV. In order to trade, investors can also use stock trading strategies like margin trading or limit orders.

● The investors can enjoy both liquidity and flexibility with closed-ended funds. That can use real-time prices to sell and buy their funds according to the market. Also, since real-time information is available of all the stocks, the investors have the flexibility to decide what to do with their investments.

To know more, click here.

This content has been created in association with YONO SBI.

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