As an existing investor, you must have come across the terms Open ended and close ended Mutual Funds, but do you really know the difference between them?
Well, Richvik presents a small article on difference between Open Ended and Close Ended funds.
- What are Open-Ended Funds?
- Open ended funds are the funds that buy and sell units on a continuous basis and thus, allow investors to enter and exit the market as per their convenience.
- The units can be purchased and sold even after the initial offering for the fund gets closed. (New funds are generally introduced in the market as New Fund Offer to attract investors to buy them).
- The units are bought and sold at the net asset value (NAV) declared by the fund.
- Here the mutual funds can daily have new investors as well as new sellers.
- What are Close- Ended Funds?
- Close Ended funds are the funds where the Investor can buy the units only during the New Fund Offer (NFO) period.
- Here, there is a certain lock-in period, wherein the new investors cannot buy the units, nor are the existing investors allowed to sell their units.
- However, the close-ended funds promise a better return, since the fund manager has the liberty of utilizing the funds in the most optimum manner during the Lock- in period.
Thus, there is no major difference between open ended and close ended funds, the major factor distinguishing them is Enter and Exit time for the fund.
Some more points of distinguishing, and which one is suitable for you are listed as follows:
- Points of differentiation:
|SERIAL NO.||OPEN- ENDED FUNDS||CLOSE-ENDED FUNDS|
|1.||Investors can enter and exit at their convenience||Investors can enter only at the time of NFO and exit after the Lock-in period ends|
|2.||The Fund house has to constantly market their funds in order to attract new investors.||Here, the fund house need not market their funds after the closing of NFO.|
|3.||The Fund house has to keep some liquidity of funds, in case an investor wishes to sell off their units, the fund house will have to pay them.||Here, the Fund house need not worry about liquidity during the Lock-in period.|
|4.||The fund house will daily have fresh investors entering and exiting from the scheme.||Here, sometimes the fund house lists the fund on Stock exchange to allow the investors to exit in certain cases.|
|5.||Buy-back option may or may not be given.||The Fund house also offers Buy-back options sometimes so as to allow the existing investors to exit in case they desire to.|
|6.||Open ended fund allows you to invest through Lump sum as well as SIP mode of Investment.||Close ended fund allow you to invest only through only Lump sum during the NFO period.|
- Which fund type should you opt for?
The fund type which you should choose is largely based on your needs of fund, investment mode and expected rate of returns. If you are willing to lock-in your funds for a particular span of time, then you should opt for Close ended funds, where there are chances of higher performance as well.
Whereas, if you opt for open-ended funds, you can invest on monthly basis through SIP mode and enter and exit at any time (though some funds charge exit load if exited within a period, of say, 12 months).
- Past Performance of funds:
|CLOSED ENDED||OPEN ENDED|
|SR. NO||CATEGORY||NAME||PAST 3 YEARS PERFORMANCE||NAME||PAST 3 YEARS PERFORMANCE|
|1||Equity- Large Cap||ICICI Prudential Growth Fund – Series 2||10.79||Axis Bluechip Fund||12.39|
|2||Equity- Mid Cap||Sundaram Select Small Cap Series IV – Regular Plan||9.74||L&T Mid-Cap Fund||14.73|
|3||Equity- Multi Cap||ICICI Prudential Value Fund- Series-3||11.89||Axis Focused 25 Fund||15.75|
|4||Hybrid||DSP BlackRock Dual Advantage Fund – Series 44 – 39 Months – Regular Plan||13.17||SBI Magnum Children’s benefit Fund||14.26|
|5||Debt||HDFC Fixed Maturity Plan – 1127 Days – May 2016||7.89||BOI AXA Credit Risk Fund- Regular Fund||9.73|
*Kindly note that Richvik is not promoting any of the above schemes, the above table was purely for information purpose.
We, at Richvik Wealth Advisory, understand the client and their needs, availability of funds and their risk taking capacity, and then suggest a financial plan to them.
To know more on investments, feel free to contact us.