Mutual fund schemes collect funds from multiple investors having the same investment goals. There are numerous types of investors with different needs and goals.
For example, some investors want to invest money for long-term goals like buying a house or paying for their children’s education. Others may decide to invest money in mutual funds to make quick, short-term profits. To meet such varying needs, various types of mutual fund schemes are designed.
Open-ended and close-ended mutual funds are two popular types of mutual funds. Funds are classified as open or close-ended based on the timing and flexibility of buying and redeeming the units. In this article, we will focus on these two mutual fund types and understand their features and differences.
What are Open-ended and Close-ended Mutual Funds?
Understand the meaning and features of open and close-ended mutual funds before choosing the right type for you.
Read: All you need to know about mutual fund investments in India
Open-Ended Mutual Funds
Open-ended mutual funds are similar to savings accounts where you can deposit and withdraw money whenever you want. It is said that open-ended mutual funds are ‘perpetual’. The units of open-ended mutual funds are open for purchase and redemption continuously.
- Open for Investments Continuously: You can purchase the units of open-ended mutual funds on any business day without restriction.
- No Lock-in Period: You can sell the units of open-ended mutual funds at the prevailing NAV of the units at any time. There is no lock-in period or fixed maturity period. However, mutual funds from the Equity Linked Saving Scheme (ELSS) category have a lock-in period of 3 years despite being open-ended.
- Suitable for All Investment Horizons: Open-ended funds are suitable for long-term as well as short-term investment goals.
Close-ended Mutual Funds
Close-ended mutual funds allow investors to buy and sell the fund units during specified periods only. Close-ended mutual funds are similar to fixed deposits. You must wait until the maturity date to get your investment returns.
- Invest During the NFO Period: You can invest in close-ended mutual funds during the initial period called the ‘New Fund Offer’ or ‘NFO’ period.
- Fixed Maturity: Close-ended funds have a predetermined maturity period. The units are redeemed at the end of the maturity period only.
- Listed on Stock Exchanges: Close-ended mutual funds are mandatorily listed on stock exchanges. This provides an opportunity to exit before the maturity period is over. You can trade the units of these funds on a stock exchange.
Open-Ended vs Close-Ended Mutual Funds: A Comparison
You must understand the difference between open-ended and close-ended mutual funds before choosing the scheme type that suits your investment goals.
| Basis | Open-ended Mutual Funds | Close-ended Mutual Funds |
| Investment Period | You can invest on any business day at the current NAV. | You can invest during the specified New Fund Offer period only. |
| Investment through SIP | You can invest in these funds through a Systematic Investment Plan (SIP). | You cannot invest in close-ended funds through a SIP. |
| Maturity/Redemption | Open-ended mutual funds do not have a lock-in period or specific maturity period.Only ELSS funds have a lock-in period. You cannot sell these units for 3 years. | Close-ended funds have fixed maturity dates and premature redemption is not allowed. |
| Listed on Stock Exchange | Open-ended mutual funds may or may not be listed on stock exchanges, depending on the scheme. | Close-ended mutual funds are listed on stock exchanges to allow investors to exit the scheme before maturity by selling their units in the market. |
| Tax Benefits | If you invest in ELSS funds, you can claim an income tax deduction of up to Rs. 1,50,000 under Section 80C. | No income tax deduction is available for close-ended mutual funds. |
Open-Ended vs Closed-Ended Mutual Funds: Which is the Better Choice?
The major difference between open-ended and close-ended mutual funds is the flexibility of investing and withdrawing your money. The right choice depends on your expected investment duration.
You can invest in open-ended mutual funds if you wish to redeem the mutual funds for your financial needs in the short term. Open-ended funds are more liquid. You can redeem your units whenever required (except for ELSS). For example, if you plan to use your investment money for traveling, you may need to withdraw it in the short term. In this case, investing in open-ended mutual funds would be a better choice.
If you plan to invest in mutual funds for the long run, close-ended funds would be more suitable. For example, if you plan to make a down payment for a house after 3 years, you can invest in mutual funds having a maturity period close to that timeline.
Conclusion
Open-ended mutual funds are perpetual. You can buy and sell the mutual fund units at any time. You can buy close-ended mutual funds during the NFO period only. These funds have a fixed maturity date. However, they are mandatorily listed on stock exchanges to provide an exit route to investors.
Choose between open-ended and close-ended mutual funds wisely after considering your future goals and expected investment horizon.
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