What is the difference between open-ended and close-ended Mutual Funds?
Investing in mutual funds is one of the most popular ways for individuals to grow their wealth and diversify their portfolios. There are two main types of mutual funds available to investors: close-ended and open-ended mutual funds. While both types of funds offer exposure to a variety of investment instruments, there are important differences between them that investors should understand.
Here are the five key differences between close-ended and open-ended mutual funds:
.Fund Structure:
The primary difference between close-ended and open-ended mutual funds lies in their structure. Close-ended funds are structured with a fixed number of shares that are issued at the time of launch, and are then traded on stock exchanges like any other security. In contrast, open-ended funds have no limit on the number of shares that can be issued, and the fund can expand or contract depending on the level of investment.
Trading:
Another key difference between close-ended and open-ended funds is the way they are traded. Close-ended funds are traded on stock. On the other hand, open-ended funds are not traded on stock exchanges, and their price is determined by the net asset value (NAV) of the fund, which is calculated at the end of each trading day.
Lock-in period:
Open-ended offers the feasibility to enter & exit at any time, whereas close-ended funds can be purchased only in NFOs; after the NFO closure, investor cannot perform any action on their investments, and they need to hold it till maturity to redeem their investments.
Liquidity:
Close-ended funds are less liquid than open-ended funds. While open-ended funds allow investors to buy or sell shares at any time, close-ended funds may only be bought or sold on the stock exchange, and there may be limited market demand for the shares. This can result in a wider bid-ask spread, making it more difficult for investors to buy or sell shares at a fair price.
While close-ended and open-ended mutual funds offer different benefits and drawbacks for investors, when choosing between these two types of funds, investors should consider their investment goals, risk tolerance, and investment horizon, and weigh the costs and benefits of each.