Mutual Funds can be categorised into a variety of sub-categories, including risk-adjusted, investment philosophy, and more. We'll be discussing open ended vs. closed ended Mutual Fund Schemes, which are divided into two categories based on redemption.
Open Ended Funds :
These schemes buy and sell units on a daily basis, giving investors the flexibility to enter and exit at their leisure. Even after the NFO (New Fund Offer) time has ended, the units can be purchased and sold. The units are bought and sold at the store's declared net asset value (NAV).
Each time the AMC offers or repurchases the present units, the quantity of extra units increases or decreases. The unit capital of an open-ended scheme changes because of this. When the AMC offers a greater number of units than it repurchases, the fund grows in size. When the AMC repurchases a larger number of units than it offers, the store's size shrinks. For example, if the government believes it is unable to handle a large amount of AUM, it can halt new investment. In any instance, the units must be repurchased under any conditions.
Closed Ended Funds:
They sell a defined number of units with a specified NAV (Net Asset Value). Investors cannot purchase closed-ended fund units once the NFO period has finished, unlike open-ended funds. This means that new investors cannot join the scheme, and existing investors cannot leave until the program's tenure expires. The fund houses, on the other hand, list their closed-ended plans on a stock exchange to assure liquidity.
Trading on the stock exchange has no effect on the number of outstanding units of a closed-ended fund. Aside from listing on an exchange, these funds occasionally offer to buy back units, providing another source of liquidity. SEBI regulations require closed-ended funds to provide at least one of the two entry and exit points for investors.
Basic Differences Between Open Ended vs Closed Ended Funds
Liquidity:
Open-ended funds have a high level of liquidity. You have the option of redeeming at any moment. While closed-ended funds have a set lock-in time, open-ended funds do not.
Trading :
Open-ended funds do not have a stock market listing. On stock exchanges, closed-end funds are exchanged.
Fund Management:
The fund manager of open ended schemes must adhere to the schemes' objectives. The fund manager is also under pressure since investors can withdraw their funds at any time. There is no redemption pressure on the fund management in a closed-ended plan.
NAV (Net Asset Value):
When you buy Open Ended schemes, you are buying at the scheme's current NAV. Closed-ended funds, on the other hand, may have a different NAV than the price at which you purchased them since they trade on exchanges.
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