Open-ended vs Close-ended Mutual Fund: Which is better for investment?

Mutual funds can be considered one of the best investment strategies if you are starting to take your first steps towards securing your future financially.

What are mutual funds? 

Mutual funds are basically pools of money managed by professional fund managers who invest in equities, bonds, money markets, or other securities. These investments in all these options depend on investors with the same investment objective.

Primarily, in India, mutual funds are divided into two types, depending on the investment structure. These are open-ended mutual funds or close-ended mutual funds, and depending on investment goals, one can choose between these two to best fit your financial objectives.

But first of all, one needs to know the difference between open-ended and close-ended mutual funds in order to understand which one aligns with their financial goals and can get the best benefits. So let's dive right into it—

Open-ended mutual funds

As the name suggests, open-ended funds are always open for investment and redemption. In India, these funds are the most popular kind of mutual fund investment and are perennially open, as they don't have any lock-in times or maturities. These funds generally don't have a limit on the amount of assets under management (AUM) up to which they can collect investments from the general public. The net asset value (NAV) for open-ended funds is determined every day using the closing value of the underlying securities. Typically, these funds do not trade on stock exchanges.

Close-ended mutual funds

In close-ended mutual funds, the investments are locked in for a certain amount of time and can only be subscribed to during the new fund offer period (NFO). These units can only be redeemed after the end of the scheme's term or the lock-in period.

Sometimes, at the end of the lock-in period, certain close-ended funds become open-ended, or occasionally, after the maturity period,  asset management company (AMC) may move the proceeds of close-ended funds to another open-ended fund, but only with the consent of the investors.

Open-ended vs close-ended mutual funds: Key differences 

• Liquidity: In open-ended mutual funds, one can buy or sell units at any time, giving them a lot of freedom on when to subscribe and redeem their fund. However, this can't be done for units of ELSS funds as they have a 3-year lock-in period since the date of investment. On the other hand, close-ended mutual funds provide no liquidity as they can only be subscribed to during the NFO period, and redemption can only be received after the end of the mandatory lock-in period.
• Ways of investing: One can invest in lump sums as well as through systematic investment plans (SIPs) in open-ended funds and can make any number of purchases in the fund. However, in close-ended funds, one can only invest during the NFO period.
• Track record: In open-ended funds, one can track the scheme's performance by checking its track record before investing in it. Since one can only buy close-ended funds during their NFO period, no track record is available.
• Small Investment Amount: One can start investing in open-ended funds with as little as Rs 500 or Rs 1,000. Whereas, Rs 5,000 is generally the minimum investment amount in a close-ended fund NFO.
• Market Volatility: Because investors can redeem their units at any moment, open-ended funds are more vulnerable to market volatility. However, closed-ended funds are not subject to daily redemption requirements and may offer greater stability when the market is down.
• Investment Strategy: Due to their flexibility, open-ended funds are often used for long-term investments or as a component of a diversified portfolio. Whereas, investors who are seeking certain investing themes or methods with a predetermined investment horizon may find close-ended funds more appealing.

Open-ended vs close-ended mutual funds: Which option should you choose?

To sum it up, open-ended funds could be a better option if you want flexibility, liquidity, and the freedom to withdraw your money whenever you choose. 

However, close-ended funds can be something worth considering if you are okay with a set investment period, possibly reduced costs, and are drawn to particular investing concepts.

The choice entirely depends on one's financial needs or objectives, and they should speak with their financial advisor before making any investment decisions.