Mutual Fund Schemes: Open Ended or Closed Ended

The mutual fund schemes can be classified into different categories based on different parameters. One of the way, the mutual funds are categorized is based on the structure of the fund.

Based on the structure there are three different categories of MF schemes:

Open Ended:  Open Ended Mutual Fund schemes are those where the fund houses buy and sell units at any time.  So the number of units are unlimited and any investor can enter or exit the fund as per their need. The units are bought and sold at NAV(Net Asset Value) declared at the end of the day.

The number of mf units available with the fund grows or reduces as per the demand of fund.  Lets Explain with example:

Suppose a fund  has some existing units and a large number of investors are interested to enter in the fund , then fund will purchase those existing units for the new investors and the no of outstanding units available with the fund will decrease. On the contrary if the investors want to exit from the fund, then fund manager will sell the units and the outstanding units with the fund  will increase.

Open end shares don’t trade on an exchange and so there is less liquidity and volatility in the price. the investor buy the units at the price of NAV in days end.

Closed Ended:  Closed Ended funds cannot be bought and sold at any time. The  investors can buy the funds during new fund offer period. Also they can exit the fund at the end of fund scheme term. But there is a flexibility to sell the fund units before term on stock exchange.

The fund units can be bought and sold in stock exchanges  through brokers. Since the units are sold in exchanges so the price is also volatile which means sometimes it trade at premium or sometimes at discounted rate to NAV depending on the market sentiment.

the number of outstanding units of the fund does not change in closed ended schemes as these are traded in stock exchanges.

Most of the mutual fund schemes are open ended.

ADVANTAGE OF OPEN ENDED SCHEME  :

  • More flexibility of buying and selling the units

  • Price is not volatile due to non involvement of trading in stock exchanges.

  • Investors participate directly in the market.

  • Open Ended Schemes outperform Closed Ended schemes most of the time

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