Mutual Funds are a popular investment option. Mutual funds are categorized based on their investment structure, namely, open-ended or close-ended mutual fund schemes.
Open-ended mutual funds are the more common mutual fund investment option, which can be purchased or sold anytime. Closed-ended mutual funds can only be purchased during the launch period and redeemed only on completion of the lock-in period or maturity.
To understand which are the best mutual funds to invest in, let us explore the key differences between these two categories of mutual funds.
Closed-ended Mutual Funds
Under a closed-ended mutual fund scheme, there is a lock-in period for the investment made. Investors can invest in closed-ended mutual fund schemes only during the New Fund Offer (NFO) period. The mutual fund unit value is based on Net Asset Value (NAV). However, the price is dependent on the demand/supply and could be traded at a premium or discount over its real value. These units can be redeemed after the completion of the lock-in period or maturity, subject to some exceptions.
Some closed-ended mutual fund schemes tend to become open-ended post the completion of the lock-in period, or when the mutual fund house transfers the proceeds from closed-ended mutual funds on maturity to an open-ended mutual fund. However, to undertake this transfer, investors of the said closed-ended mutual fund consent are required.
Open-ended Mutual Funds
These are the most common kinds of mutual funds in India with no lock-in period or maturity period. Thus, investors are free to invest in and redeem such mutual funds anytime. Under open-ended mutual funds, the NAV gets calculated daily, based on the value of the securities at the end of the trading day. These mutual funds do not get traded on the stock exchanges and have no limit on the number of units that can be issued.
Understanding Fundamental Differences Between Open-Ended and Closed-Ended Mutual Funds
| Particulars | Open-Ended Mutual Fund | Closed-Ended Mutual Funds |
| Investment mode | Can invest either a lump sum or Systematic Investment Plans (SIPs) | Investment only through lump sum; SIPs are not allowed |
| Limit on purchases | Any number of purchases can be made in the mutual fund | Investment can be made only at the time of mutual fund launch during the NFO period |
| Track record | Investment can be made by checking the past performance track record of the mutual funds to be invested | Since investments are made only at the time of mutual fund launch their NFO period, there is no track record available |
| Liquidity | High liquidity as units (except ELSS funds with a 3-year lock-in period) can be purchased or sold anytime | There is no liquidity during the lock-in period or till maturity. Redemption amounts are available only after the lock-in period or on maturity. |
| Investment amount | Investments can be stated with amounts as low as Rs. 500 or Rs.1,000 | Normally, Rs 5,000 is the minimum investment amount required |
| Price averaging | Price averaging is possible when invested through SIPs. For lump sum investment, the investment is done as per market level. | Price averaging is not available as post the NFO period, no fresh investments are accepted in the said fund |
Conclusion
A closed-ended mutual fund assigns a specific number of mutual fund units that can be traded on a stock exchange, and hence, it works like an exchange-traded fund. Therefore, it is better suited for investors having long-term investment goals. On the other hand, open-ended mutual funds are not bound by any kind of lock-in period or maturity, making them more flexible and liquid as compared to a closed-ended mutual fund scheme. You can explore various mutual funds on Kotak Mahindra Bank website.
