Introduction
The rapid growth of the overall Indian economy in the modern era is accompanied by evolving investment aspirations. People have started realising the potential of savings, investments and market forces. They are willing to navigate the markets to earn their exposure and potentially beat the market forces. However, they may also be concerned about the market risk.
A mutual fund is an instrument that has the potential to address all these needs. It seeks to simplify the investment process through Systematic Investment Plans (SIPs) and provide the desired asset exposure and professional help for fund management.
However, investors should understand the aspects of mutual fund investments before allocating their funds. One such aspect is the fund category based on its management. It categorised schemes into open-ended mutual funds and close-ended mutual funds. Let’s understand the details of these categories and their differences.
What is an Open-Ended Mutual Fund?
This type of funds allow investors to purchase or sell mutual fund units anytime based on the scheme’s Net Asset Value (NAV) in the market. It provides the benefits of continuous liquidity without any maturity conditions.
| Advantages | Disadvantages |
| Liquidity is the crucial characteristic of these funds. | Usually, it needs active management, which may attract some cost. |
| Opportunity to diversify in different assets. | Funds can be prone to market volatility. |
| Due to the availability of SIP facilities, investments can be as low as ₹500. | The ease of liquidity may attract heavy withdrawals or inflow. |
Open-Ended Mutual Fund Trend in India
Based on the mutual fund data, these funds are potentially popular among investors.
The rise of these open-ended mutual fund categories indicates investor’s preference for the liquidity feature. Moreover, it helps investors switch or include diverse assets in their portfolios. Let us understand an opposite category to this: Close-ended funds.
What is a Close-Ended Mutual Fund?
In this category, the investment can be done only in the initial issue. Similar to the stock market, mutual funds have an initial offer of units known as a New Fund Offer (NFO). After this issue, no investor can invest or purchase units of such a scheme. Therefore, SIP is not allowed in these funds.
Moreover, the close-ended funds have a defined maturity period, which locks the funds up to redemption. If an investor is willing to sell these units before maturity, they have the facility of selling it on the exchanges as these are the only funds allowed to be listed on the exchange.
| Advantages | Disadvantages |
| The long-term horizon of these funds and lock-in criteria encourages compulsory savings. | Due to the sole purchase opportunity, the cost cannot be averaged through the investment period. |
| The tax implication may also be lower in the long term. | Lock-in may not be suitable against growing inflation. |
| A rise in NAV after NFO may generate potential gains. | Liquidity may be a concern for investors in this fund. |
Investors willing to invest a potential amount for the long term may find close-ended funds suitable.
Close-Ended Mutual Fund Trend in India
In India, these funds have declined significantly over the years. This is potentially due to the rise in inclination towards SIPs in India.
Merely understanding ‘what is an open-ended mutual fund’ may not be enough. Investors should string the distinction between it and close-ended funds to select the suitable category.
Difference Between Close-Ended and Open-Ended Mutual Fund
Investors can select between these funds based on the time horizon of their financial objectives.
| Points of Difference | Open-Ended Mutual Fund | Close-Ended Mutual Fund |
| Investment Entry | Investors can purchase units in NFO and SIPs. | Investors can purchase units only in NFO. |
| Redemption | There is no restriction on the sale of units. | It has a prescribed maturity period before redemption. |
| Listing | Units of these funds are not listed on exchanges. | It allows investors to sell units on exchanges. |
| Liquidity | It provides continuous liquidity. | It may prescribe a specific lock-in period. |
Investors should analyse these features before investing. Moreover, they can consult their financial advisors for better assistance.
Final Thoughts
Mutual funds investment may have gained immediate popularity since its introduction, but merely following the trend may not benefit every investor. People should analyse the categories, such as close-ended and open-ended mutual fund schemes, to seek suitable options. Investing can be a serious decision, and investors may require professional expertise, which can be obtained from their financial advisors.
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