Difference between Open-Ended and Closed-Ended Mutual Funds
When you invest in mutual funds, you become a part-owner in the portfolio of investment. The mutual funds can be classified as open-ended and closed-ended mutual funds based on their structure and how they are bought and sold by investors. Let us see how open-ended mutual funds differ from closed-ended mutual funds!
Open-ended Mutual Funds:
Open-ended mutual funds are the funds that can issue and redeem shares at any time. They allow investors to enter and exist as per their convenience. Investors purchase mutual fund shares directly from the fund itself instead of buying it from the exchange. The shares are offered through a fund company that sells shares directly to investors. The number of shares is not fixed in open-end funds, theoretically, they are unlimited. So, the investors can buy as many shares as they want.
As the shares can be bought or redeemed anytime, the number of units goes up and down on a regular basis. Investors purchase shares at a price determined by the fund?s per-share net asset value (NAV) including the shareholder fees imposed by the fund. When the investors want to sell the shares they can sell them back to the fund at the net asset value (NAV) declared by the fund.
Closed-ended Mutual Funds:
The closed-end mutual fund, which is also known as “closed-end Company”, is a type of mutual fund that sells a fixed number of shares only once at the initial public offering, so the shares are not offered continuously for sale. They can be bought and sold only on an exchange such as BSC and NSE etc.
The prices of the closed-end fund shares are determined by supply and demand instead of net-asset value (NAV). So their market price can be greater or less than the NAV of shares. Generally, the closed-end mutual fund does not buy its shares back from investors upon request. Furthermore, the investors cannot buy the shares after the NFO period of the fund is over. So, the new investors cannot enter and the existing investors cannot exist till the term of the scheme ends.
Based on the above information, some of the key differences between Open-ended mutual funds and close ended mutual funds are as follows:
| Open-ended Mutual Funds | Close-ended Mutual Funds |
|---|---|
| The mutual fund continuously offers new units or shares for sale. | This type of mutual fund offers new units or shares to investors only for a limited period. |
| It has no fixed maturity. | It has fixed maturity period, e.g. 3 to 5 years. |
| Liquidity provider is the fund itself. | The liquidity provider is the stock market. |
| They are not listed on stock exchange. | They are listed on the recognized stock exchange for trading. |
| Transactions are executed at the end of the day. | Transactions are executed in real time. |
| Shares are bought and sold at the net-asset value (NAV). | Price of shares is determined by demand and supply. |
| The investors can sell their shares back to the fund. | The fund is not bound to buy its shares back from investors. |