What are Open-Ended Mutual Funds?

As the name itself signifies, open-ended mutual funds have no maturity period or tenure and are permanently open. The units of the mutual fund are available for subscription throughout the year. Another major highlight of such funds is that there’s also no fixed limit on the number of units or the fund size. New units are created each time an individual invests in the fund.

Furthermore, with open-ended mutual funds, the value of each unit (the Net Asset Value) is calculated at the end of every trading day. The Net Asset Value of a mutual fund unit changes based on the market forces of demand and supply.

Since an open-ended mutual fund is not listed on a stock exchange, its units cannot be traded between investors like stocks. Any purchase or sale of mutual fund units is routed through the fund house directly. For instance, when individuals invest in an open-ended fund, they purchase the units from the fund house directly and sell them back to the fund house when they wish to liquidate their investment.

What are Close-Ended Mutual Funds?

Before we take a look at the comparison between open-end vs closed-end funds, let’s quickly try to understand close-ended mutual funds.

Close-ended mutual funds remain open for subscription only for a limited period from the time of launch (New Fund Offer). Individuals interested in subscribing to the units of such funds should apply within the subscription period. This is very similar to the Initial Public Offering (IPO) of a stock.

Close-ended mutual funds generally have a lock-in period. Investors who have subscribed to the units of the funds can opt for redemption only after the expiry of the specified lock-in period. Some close-ended funds automatically get converted into open-ended funds after the expiry of the lock-in period, giving investors an easy way out.

Open-Ended vs Close-Ended Mutual Funds: The Differences

Now that you’ve gotten a good look at both these types of mutual funds, let’s compare open-end vs closed-end funds with each other to see how they differ.

Particulars	Open-Ended Mutual Funds	Close-ended Mutual Funds
Lock-In Period	Such funds have no lock-in period. The units of open-ended funds can be bought and sold at any point in time. The only exception to this is the Equity Linked Savings Scheme. It is an open-ended mutual fund that has a 3-year lock-in.	Close-ended mutual funds have a specific lock-in period. Redemption of the units of such funds is only possible after the expiry of the said lock-in.
Liquidity	Open-ended funds are highly liquid since the units can be bought and sold freely without any restrictions.	Close-ended mutual funds have no liquidity since they can only be redeemed after the expiry of the lock-in period.
Mutual Fund Units and Fund Size	There’s no limit on either the number of units in open-ended mutual funds or the fund size. New units are created by the fund house as and when individuals invest money into the fund.	The number of units and the fund size in close-ended mutual funds is limited. Investors cannot invest in such funds once all the listed units have been subscribed.
Investment Method	Open-ended mutual funds support both lump-sum investments as well as Systematic Investment Plans (SIPs).	Since you can only subscribe to the units of a close-ended fund during the New Fund Offer (NFO) period, only lump-sum investments are allowed.
Track Record of Performance	Since open-ended mutual funds are perpetual by nature, track records of past performances are available	Close-ended funds do not have any track record of performance.
Minimum Investment	The minimum amount of investment in an open-ended mutual fund starts at ₹500.	The minimum amount of investment in a close-ended mutual fund starts at ₹5,000.

Conclusion

As you can see, there are 6 major points of difference between open-ended vs close-ended mutual funds. Remember to take these differences into account before determining the right investment option for you. Here’s a tip that you can use. If you value liquidity, investing in open-ended funds is advisable. On the other hand, if liquidity isn’t important, you can consider investing in close-ended funds.

No matter which type of mutual fund you plan to invest in, you need to first open a demat account in your name. Motilal Oswal offers a 2-in-1 demat and trading account for free. Simply visit the website of Motilal Oswal to apply for one and kick-start your wealth creation journey.