- 3 Fund Types: Open-End, Closed-End, ETFs | Bankrate.com
- What are closed-end funds?
- What are exchange-traded funds?
- Indexed vs. active management
- Closed-end funds
- Open-end Mutual Funds — Overview, Net Asset Value, Pros and Cons
- Quick Summary:
- Breaking Down Open-end Mutual Funds
- Understanding Net Asset Value
- Pros and Cons of Open-end Mutual Funds
- Related Readings
- Open-End Funds vs. Closed-End Funds: A Guide
- What Are Open-End Funds and How Do They Work?
- Closed-End Funds Explained
- Open-End Funds: Pros and Cons
- Pros and Cons of Closed-End Funds
- The Bottom Line
- Tips for Investors
- Open Ended vs Closed Ended Mutual Funds | Top 14 Differences
- Key Differences
- Open Ended vs Closed Ended Mutual Fund Comparative Table
- Recommended Articles
- Comparative Analysis of Open-Ended and Close-Ended Funds
- 2.Advantages of Closed-Ended Funds
- 3.Disadvantages of Closed-Ended Funds
- 4.Open-Ended Mutual Fund
- 5.Advantages of Open-Ended Funds
- 6.Disadvantages of Open-Ended Funds
- 7.Comparison Between Open-Ended and Closed-Ended Mutual Funds
3 Fund Types: Open-End, Closed-End, ETFs | Bankrate.com
What do open-end funds, closed-end funds and exchange-traded funds all have in common?
Investors can use all three options as an easy and low-cost way to establish a diversified portfolio that reflects a particular investment objective.
But each of these fund types is structured differently.
Open-end mutual fund shares are bought and sold on demand at their net asset value, or NAV. The NAV, which is the value of the fund’s underlying securities, is generally calculated at the close of every trading day. Investors buy shares directly from a fund.
What are closed-end funds?
Closed-end funds, which are lesser known but more than a century old, have a fixed number of shares and are traded among investors on an exchange.
stocks, their share prices are determined according to supply and demand, and they often trade at a wide discount or premium to their NAVs.
According to the Investment Company Institute, more than 90 percent of closed-end funds calculate the value of their portfolios every day.
What are exchange-traded funds?
Exchange-traded funds, or ETFs, also trade stocks on an exchange, but their market prices hew more closely to their NAV than closed-end funds. Under normal market conditions, premiums and discounts usually stay within 1 percent of NAV, with the exception of some smaller ETFs that trade infrequently. Investors can trade intraday.
Both open-end and closed-end funds have been around for many decades. Closed-end funds, which are the oldest, date back to the late 19th century. ETFs launched about 25 years ago and are becoming more popular. Inflows for ETFs hit $464 billion in 2017, according to data from State Street Global Advisors.
Still, mutual funds remain the most popular in terms of total assets because of their prominence in workplace retirement plans, such as 401(k)s. Closed-end funds have the smallest market share: Their total assets increased to $275 billion in 2017, according to an Investment Company Institute report.
Just because open-end funds are the most popular does not always mean they are the best option or that other fund types should be ignored. In fact, financial advisers have been favoring ETFs to their clients.
Closed-end funds have their fans as well. Households with close-end funds tend to be more affluent, per Investment Company Institute.
Before investors choose between these funds, they should understand the unique characteristics of each fund type and consider their own risk tolerances.
In the market for a broker? Read Bankrate’s brokerage reviews and find the one that fits your needs.
Indexed vs. active management
ETF fans point to their lower cost as a clear advantage over mutual funds.
But, the costs of the funds reflect the differences in how they are managed.
Actively managed funds, where managers actively trade securities to maximize returns, are more expensive than funds that track a particular index, such as the Standard & Poor’s 500 index.
Index funds can have fees below one-tenth of 1 percent, whether they are mutual funds or ETFs. The higher price of actively managed funds, which can have fees that top 1 percent, is a consequence of the high cost of overhead, such as supporting a research staff who are trying to beat the market.
“Obviously, there is a cost to all of that,” says Greg McBride, CFA, chief financial analyst for Bankrate.com.
Un other funds, closed-end funds often trade at enormous premiums — trading at a share price higher than the NAV — or discounts, trading at a share price lower than the NAV.
While buying at a discount could seem a deal, it could also point to the fund’s poor performance or another problem. So, investors are encouraged to do their homework and research a closed-end fund’s historical performance. Most importantly, the discount shouldn’t be the deciding factor.
“The bigger question is whether closed-end funds are right for you,” says McBride. “You are building a portfolio.”
While closed-end funds are viewed as useful for generating income, their quirks can scare investors away. Closed-end funds’ can use leverage investing, which helps them make more money in good times, but they can lose a lot of money in bad times as well.
“It can require a strong stomach because of leverage,” says Cara Esser, CFA, a senior investment research analyst in Mesirow Financial’s retirement planning and advisory group.
While ETFs and open-end funds can also use leverage, Esser says it’s more prevalent in closed-end funds.
And remember, a fund’s high dividend yield reflects the high risk behind the fund. Taking on the risk could potentially lead to greater returns. But, it could also lead to grief.
“Be cautious about yield chasing,” says Esser.
Open-end Mutual Funds — Overview, Net Asset Value, Pros and Cons
Open-end mutual funds refer to mutual funds that issue shares to investors the fund’s net asset value (NAV)Net Asset ValueNet asset value (NAV) is defined as the value of a fund’s assets minus the value of its liabilities.
The term «net asset value» is commonly used in relation to mutual funds and is used to determine the value of the assets held. According to the SEC, mutual funds and Unit Investment Trusts (UITs) are required to calculate their NAV per share.
In an open-end mutual fund, investors purchase shares directly from the mutual fund at the net asset value (the value of the fund’s underlying securities) per share rather than from the existing shareholders.
- In an open-end mutual fund, investors purchase shares directly from the mutual fund rather than from existing shareholders.
- The share price paid for an open-end mutual fund – net asset value per share – is the per share price that new investors pay for a share in the mutual fund.
- Open-end mutual funds must maintain a high cash reserve, which lowers the return of the mutual fund.
Breaking Down Open-end Mutual Funds
An open-end mutual fund is a collection of investor money pooled together to achieve a common investment objective. As the name implies, an open-end mutual fund is open to new investors.
Investors who want to purchase shares of an open-end mutual fund would purchase it directly from the fund manager.
It contrasts with closed-end mutual fundsClosed-end Mutual FundsClosed-end mutual funds are mutual funds that raise a fixed amount of capital from investors through an initial public offering and lists its shares on a where investors purchase from existing shareholders.
The money pooled by investors is managed by a mutual fund manager who invests according to the mutual fund style. For example, assume three investors pool together $300 and are issued one share each.
The $300 is managed by a fund manager who invests the money in securitiesPublic SecuritiesPublic securities, or marketable securities, are investments that are openly or easily traded in a market. The securities are either equity or debt-based..
If the price of the securities doubles over the next year, the net asset value of the fund would be $600 ($300 x 2). With each investor holding one share, their per share price in the mutual fund would be $200 ($600 / 2).
Investors who are interested in joining the mutual fund can purchase shares directly from the fund manager at the net asset value per share of $200. Assume three new investors contribute $600 in total.
The new net asset value would be $1,200 ($600 NAV + $600 contribution), and the shareholders would be issued 3 additional shares in the mutual fund.
With six outstanding shares in the mutual fund, the net asset value per share remains $200 ($1200 / 6).
Understanding Net Asset Value
In an open-end mutual fund, investors purchase shares of the mutual fund at the net asset value. An understanding of net asset value is important when talking about open-end mutual funds.
The net asset value (NAV) is the net value of the mutual fund and is calculated as follows:
Net Asset Value = Total Value of Assets – Total Value of Liabilities
When potential investors purchase shares of an open-end mutual fund, the price paid is the net asset value divided by the number of shares currently outstanding:
Net Asset Value per Share = Net Asset Value / Shares Outstanding
Mutual Fund A is an open-end fund with a net asset value of $1,000. Currently, there are 100 shares outstanding. John wants to purchase 100 shares of Mutual Fund A – what price does he pay? How does it affect existing shareholders of the mutual fund?
Given that the net asset value of the fund is $1,000, and there are 100 shares outstanding, the net asset value per share is $10 ($1,000/10). For John to purchase 100 shares of Mutual Fund A, the total price he pays is $1,000 ($10 x 100).
After the purchase of shares in Mutual Fund A, the net asset value is now $2,000 ($1,000 initial value and + $1,000 contribution from John). With a net asset value of $2,000 and 200 shares outstanding in Mutual Fund A, the shares of existing shareholders would be priced at $10. Existing shareholders are not affected by additional share purchases made by new investors.
Pros and Cons of Open-end Mutual Funds
- Mitigation of unsystematic risk due to the fund holding diversified securities
- Managed by a portfolio managerPortfolio ManagerPortfolio managers manage investment portfolios using a six-step portfolio management process. Learn exactly what does a portfolio manager do in this guide. Portfolio managers are professionals who manage investment portfolios, with the goal of achieving their clients’ investment objectives. with the help of analysts
- Require low initial investment contributions
- Highly liquid
- The net asset value per share is priced daily
- The fund must maintain a high cash reserve due to the possibility of investors redeeming their shares
- It charges management fees and expenses
- Generally, they provide lower returns than a closed-end mutual fund (due to the cash held by the mutual fund and not invested)
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- Investing: A Beginner’s GuideInvesting: A Beginner's GuideCFI's Investing for Beginners guide will teach you the basics of investing and how to get started. Learn about different strategies and techniques for trading, and about the different financial markets that you can invest in.
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Open-End Funds vs. Closed-End Funds: A Guide
Mutual funds can be a good way to invest if you want to diversify your portfolio without buying individual stocks or bonds. Aside from knowing which share class you’re investing in, you also need to know whether you’re buying an open-end or closed-end fund. This primer can help you understand the difference when deciding which mutual funds to buy.
What Are Open-End Funds and How Do They Work?
When you buy a mutual fund, you’re buying shares in that fund. An open-end fund has no limit on the number of shares it can issue. So, when you purchase your shares, more shares are created. If you sell your shares, the open-end fund buys them back.
Open-end fund shares are purchased at what’s known as their Net Asset Value or NAV. This number reflects the total market value of the assets held in the fund at the end of each trading day, less liabilities and divided by the total number of outstanding fund shares.
Market value of the fund’s underlying assets is calculated daily at the end of trading.
So, if the fund includes a mix of stocks and bonds, then the final closing price of the individual stock and bond holdings can be used to tally up the fund’s market value.
This means the fund’s NAV can change daily as stock market prices fluctuate during trading hours. Essentially, NAV reflects how a fund performs on any given day.
Examples of open-end funds include traditional mutual funds, hedge funds and exchange-traded funds (ETFs), which are funds that trade on an exchange a stock. You can buy and sell these kinds of funds in an employer-sponsored retirement plan, such as a 401(k), in an individual retirement account or through a taxable brokerage account.
Closed-End Funds Explained
Closed-end funds take a different approach. Instead of having an unlimited number of shares, these funds have a fixed number of shares to trade. If shares in the fund are sold, no new ones are issued.
These types of funds are associated with the launch of an IPO, or initial public offering, when a company is opening up its shares for purchase to investors for the first time. A closed-end fund can be useful for generating income in a portfolio if the fund’s price increases after its IPO.
Aside from having a limited number of shares available for trading, closed-end funds differentiate from open-end funds in how they’re valued. Rather than trading at NAV, the share price for closed-end funds is tied to how supply and demand move throughout the trading day.
This means that funds can be priced above or below their true value, depending on the balance between supply and demand. Low supply and high demand can result in a closed-end fund trading at a premium, compared to its NAV. On the other hand, high supply and low demand for a fund could push the per-share price down.
Access to closed-end funds comes through brokers; you won’t find them in your employer’s retirement plan. You can buy and sell shares through a brokerage, which typically means paying a commission fee for each trade.
Open-End Funds: Pros and Cons
Open-end funds have a few things working in their favor from an investor’s perspective. One of the biggest advantages is accessibility since you have more opportunity to invest in these funds, either inside or outside of a tax-advantaged account.
closed-end funds, open-end funds are professionally managed. The burden of choosing the right investment to hold in the fund is placed on the fund manager. All you have to do is decide which fund to invest in, making diversification a much simpler task.
These funds also have an advantage when it comes to trading price since NAV is recalculated daily. This can make it easier to trade in or the fund with some predictability in pricing and returns built-in.
On the other hand, open-end funds can become problematic when a redemption happens. This is when an investor sells off a large number of fund shares all at once.
In that scenario, the fund may have to sell assets to generate cash they can use to pay investors. If assets are sold at a profit, a capital gains distribution gets passed on to investors.
You’ll have to pay tax on that distribution at the end of the year.
Something else to keep in mind is that prices for these funds are set once per day at the end of trading. That means you have to wait until the end of the day to determine what your profit (or loss) on the trade is, the NAV at close.
Pros and Cons of Closed-End Funds
The chief pro of closed-end funds is the potential to earn higher returns if you buy fund shares at a steep discount compared to net asset value. Assuming share prices rise, closed-end funds could be profitable. The ability to trade these funds throughout the day you would a stock means you have more opportunity to capitalize on pricing movements than you would with an open-end fund.
The trade-off is that closed-end funds can carry a higher degree of risk compared to their open-end counterparts. If you’re considering this type of fund, it’s important to do your research first to make sure you understand what you’re buying. A few things to consider include:
- What type of underlying assets the fund holds
- Historical performance
- How fund pricing corresponds to NAV
- Dividend yield if the fund pays dividends
- The amount of debt the fund is carrying
With both open-end and closed-end funds, consider the cost as well. Both types of funds will charge an expense ratio, which is the percentage you pay annually in management fees. The lower this number, the better it is for preserving your returns. Also, consider any commission fees you’ll pay to trade these funds in a taxable brokerage account.
The Bottom Line
Whether you choose open-end or closed-end funds for your portfolio ultimately depends on your investment objectives. Reviewing your risk tolerance, risk capacity, diversification needs and overall goals for investing can help you decide which funds are the best fit for your strategy in the short- and long-term.
Tips for Investors
- If you’re planning to buy fund shares through a brokerage, remember to compare the fees carefully. Some online brokerages may be more fee-friendly than others, which is good to know if you plan to trade frequently. Also, look into which brokerages offer commission-free trading for open-ended mutual funds and ETFs.
- Consider getting help from a professional financial advisor if you want to learn more about how mutual funds work. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
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Open Ended vs Closed Ended Mutual Funds | Top 14 Differences
An open-ended mutual fund gives utmost liberty and flexibility to investors to enter and exit as and whenever they feel and its variation is totally dependent on the investors’ faith whereas in close-ended mutual funds offers a fixed timeline to investors for participating in and the fund.
A mutual fund is a professionally managed investment scheme in which the investors can have access to diversified portfolios with a mix of equities, bonds, and other securities with a limited amount of capital.
Such funds are very helpful for retail investors and are also viewed as an investment opportunity over a period of time. All mutual funds are registered with their respective regulators for the securities market e.g., SEBI in India, which will offer a level of comfort to investors and prospects.
They have to function within the provisions of strict regulation created to protect the interests of the investors.
One can invest in these funds by purchasing its units/shares at the existing NAV (Net Asset Value) of the fund, which is volatile depending on the performance of the stocks a part of the portfolio.
The funds are managed by professional money managers who are responsible for investing the capital amount of the investors with an aim to produce Capital Gains and income for the investors. The investment is made on behalf of all the investors, and hence a lot of skills are required.
The investment objectives and its structure are clearly stated in its Prospectus, which is a legal document and has to be abided by the same.
There are various types of mutual funds that can be broken down on the basis of the maturity time frame and also by investment objective.
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The below diagram can give a clear snapshot of mutual funds.
Let’s see the top differences between open-ended vs closed-ended mutual funds.
- These funds have some basic similarities between them, which maintain the base and categorizing them under mutual funds.
- Both these funds are managed professionally with an aim to exceed the investments which have been made by a large pool of investors.
- It aims to achieve the same through diversification in multiple investment assets rather than a single stock.
- The commission or fees of the investment managers can depend on the returns they are able to garner from the market.
- Another point of similarity refers to the Economies of scale, whereby gathering a large pool of funds from multiple investors enables the investment and operating costs to be lowered.
- Open-Ended funds are popular amongst typical investors as it permits them to enter and exit at any time, thereby offering them a lot of flexibility. Close-ended funds have a fixed number of shares that are purchased from other investors and have a fixed timeline to enter and exit the fund.
The New Fund offer may stay open for, say 30 days post, which no units will be exchanged.
- The transactions of Open-ended funds are performed directly through the fund, whereas close-ended ones are initially launched through an IPO (Initial Public Offering) subsequent to which they are listed on the stock exchange, on the OTC market, or an Exchange Traded funds.
- The corpus of an open-ended fund will keep on varying since it will involve dynamic buying and redemptions, whereas, on the other hand, the corpus remains fixed since new units are not offered for sale beyond the limit, which has been specified.
- The prices for open funds are fixed once a day at the NAV (Net Asset Value), preferably at the end of the day, and are the price at which fund shares can be purchased for that day. Close-ended funds traded throughout the day ordinary stocks and traded at the prevailing price any time during the day since it works on a real-time basis.
- The structure of open-ended funds is prescribed since its inception and will largely include investments in Equities, Bonds, and Gilt-edged securities, whereas closed-ended funds will include alternative investments in its portfolio such as Futures, Derivatives, and FOREX.
- The selling price of an open-ended fund involves the NAV and any entry/exit load as prescribed by the Prospectus. These loads are charges which are implemented for entering or exit the fund or both primarily for management of the funds. Close-ended funds are traded at a Premium or Discount to the NAV.
- NAV’s of various funds are quoted in daily newspapers or on the website of the fund for open-ended funds. Closed-ended funds can obtain their NAV from financial newspapers or through the website on a weekly basis.
- The total number of shares for each of the stocks and bonds in open-ended funds are multiplied by the closing price, and the resultant for each investment is added together. Any liabilities associated with the fund are excluded (such as accrued expenses). The NAV per share is arrived at by dividing the Total Net assets by the number of outstanding shares.
Prices of shares for closed-ended funds are determined as per the demand and supply prevailing in the market, and prices would be determined accordingly on the stock market.
- Open-ended funds permit systematic purchases irrespective of the market conditions and also allow investments in smaller quantities, un closed-ended funds, which allow only lump-sum investment, making it riskier for investors to consider, especially under choppy markets conditions.
Trends have also suggested that closed-ended funds come up when markets are performing exceedingly well, tempting prospective investors.
- Asset allocation or rebalancing is possible in the cases of open-ended funds, which consider Goal-based planning and thus understand the importance of asset allocation in an investment portfolio. The structure of the funds can be adjusted in case of a turnaround in the general market scenario. If the equity market is rising and heading saturation, one may want to redeem a portion of the same and divert the same towards debt funds. Such flexibility is not possible in a closed-ended structure. Structural changes are not permitted, and the investors would not be aware of the internal details or also the bond yields in case of a long term investment.
Open Ended vs Closed Ended Mutual Fund Comparative Table
|Basis for Comparison||Open-Ended Mutual Funds||Closed-Ended Mutual Funds|
|Meaning||Continuous buying and selling of the units||Capital is fixed, selling a specific number of units.|
|Entry & Exit||Convenience as per the investors||Participation only till the NFO (New Fund Offer) is on.|
|Availability||Funds are not traded in the open market and get repriced the number of shares bought and sold. Transactions are performed directly through the fund.||They are launched through an IPO for raising money and subsequently listed a stock or an ETF.|
|Price Determination||The NAV per share is arrived at by dividing the Total Net assets by the number of outstanding shares. Any additional expenses have to be reduced from the total assets.||The value is the NAV, but the actual price is determined by the demand and supply making it possible to trade at prices above or below the value of its holdings.|
|Management Style||It can be active, passive, or a combination depending on circumstances.||It follows an Active style of management.|
|Maturity Period||No Fixed maturity||A fixed maturity period can normally range from 2-5 years.|
|Publishing of NAV||Published on a daily basis||Published on a weekly basis|
|Profits||Profits depend on the investors, and when they exit the fund. If they have exceeded their initial investment, then it is considered as a Gain.||Profits to the shareholders can be in the form of income and capital gain distributions. It can also be capital gains realized from the sale of shares with increasing share value though it is exposed to tax liability.|
|Corpus||Varies depending on the confidence of the investors.||Corpus remains fixed as new units are not issued.|
|Selling Price||NAV plus entry or exit load as specified in the Prospectus||Traded at Premiums or Discounts to their NAV’s|
|Trading||Purchased directly from the underwriter of the fund||Bought and sold through brokers. Brokerage firms underwrite and sell newly-issued shares.|
|Restrictions||Reasonable restrictions on investment in Leverage & Liquidity due to high levels of volatility and risks involved.||Fewer restrictions with respect to leverage and liquidity but strict regulatory limits would be applicable.|
|Minimum Investment||Smaller investment which is attractive to retail investors with limited disposable money.||Lump-sum investment is permitted.|
|Liquidity||Investments which can be easily liquidated||Investments are tilted towards illiquid securities that cannot get sold at the NAV within seven days.|
Despite each of the categories having its pros and cons, the decision to make the investment rests in the hands of the investors and their investment objectives. It also depends on the risk appetite of the investor. A retail investor with a limited amount of capital will prefer an open-ended fund as it offers a lot of flexibility with relatively stable returns.
Considering an investment in closed-ended mutual funds could be a dilemma for investors who are new in the market. Since the securities within this structure sell at a premium or discount to the NAV, it requires determining the intrinsic value of the underlying security for deciding whether the investment is fruitful or not.
This has been a guide to Open-Ended vs Closed Ended Mutual Funds. Here we discuss the top differences between open-ended and closed-ended Mutual Funds along with infographics and a comparative table. You may have a look at these articles below to learn more about Mutual Funds –
Comparative Analysis of Open-Ended and Close-Ended Funds
Mutual funds are differentiated their structure, i.e. whether they are open-ended or closed-ended schemes. The difference between the two types of funds is a function of flexibility and the ease of sale and purchase of fund units. This article covers the following:
Closed-ended mutual funds assign a fixed number of fund units that are traded on stock exchanges. Close-ended funds function more an exchange-traded fund (ETF) rather than a mutual fund. They are issued through new fund offer (NFO) to raise money and then traded in the open market, similar to stocks.
Though the value of the fund is the NAV, the actual price of the fund is proportional to supply and demand as it can trade at prices above or below its real value. Hence, closed-end funds can trade at premiums or discounts to their NAVs. Units of closed-ended funds are purchased and sold through brokers.
Closed mutual funds usually trade at discounts to their underlying asset value. These funds also have a fixed maturity period.
2.Advantages of Closed-Ended Funds
a.Stable Asset Base
In closed-ended funds, the investors can redeem their units only on predefined dates, i.e. when the fund matures.
This allows portfolio managers to get a stable base of assets, which is not subject to frequent redemptions. A stable asset base allows the fund manager to formulate an investment strategy more comfortably.
The fund managers can also keep the fund objectives holistically in mind without having to worry about the inflows and outflows in the case of stable asset bases.
b.Availability of Market Prices
Closed-ended funds primarily trade on stock exchanges equity shares. This provides an opportunity for investors to buy/sell fund units real-time prices, which can be above (premium) or below (discount) the fund’s NAV. They can also make use of the usual stock trading strategies market/limit orders and margin trading.
c.Liquidity and Flexibility
Investors are allowed to liquidate closed-ended funds as per the fund norms. Investors can utilise real-time prices available during the trading day to buy/sell closed-ended fund units at the prevailing market prices. This provides the necessary flexibility to decide on their investments by using real-time information.
3.Disadvantages of Closed-Ended Funds
Performance of the closed-ended schemes has not been on par with open-ended peers across different time horizons. The lock-in period on closed-ended funds are aimed at giving the fund managers the flexibility to allocate the funds without the fear of outflows has not helped much in generating better returns.
b.Lump Sum Investment
Closed-ended funds require you to invest a lump sum at the time of their launch. This can be a risky approach to deal with your investments. It exposes you to take bigger bets than otherwise warranted. Moreover, a large number of salaried class of investors are unable to afford lump sum investments. They, instead, prefer staggered investments by way of systematic investment plans (SIP).
c.Non-Availability of Track Record
In case of open-ended funds, investors can review the performance of the funds over different market cycles on account of availability of historical data. However, in the case of closed-ended funds, the track record is not available. Hence, investing in a closed-ended fund attracts uncertainties for which you can only depend on the fund manager.
4.Open-Ended Mutual Fund
Open-ended funds are what you know as a mutual fund. These funds do not trade in the open market. They don’t have a limit as to how many units they can issue. The NAV changes every day because of the share/stock market fluctuations and bond prices of the fund.
Open-ended mutual fund units are bought and sold on demand at their Net Asset Value or NAV, which is dependent on the value of the fund’s underlying securities and is calculated at the end of every trading day. Investors buy units directly from a fund.
The investments in open-ended funds are valued at the fair market value, which is also the closing market value of listed public securities. These funds also do not have a fixed maturity period.
5.Advantages of Open-Ended Funds
Open-ended funds offer high liquidity due to which you can redeem your units at your convenience. When compared to other types of long-term investments, open-ended funds provide the flexibility for redemption at the prevailing Net Asset Value (NAV).
b.Availability of Track Record
In case of a closed-ended fund, you cannot review the performance of the fund over different market cycles on account of non-availability of track record. However, in the case of open-ended funds, the historical performance of the fund is available. Hence, investing in an open-ended fund is a well-informed decision.
c.Systematic Investment Form
Closed-ended funds require investors to invest a lump sum to buy the units of the fund at the time of their launch. This can be a risky approach to deal with your investments. It exposes you to take bigger bets than otherwise warranted. However, open-ended funds is a suitable investment option for a large number of salaried class of investors. It is because they can invest via systematic investment plans (SIP).
6.Disadvantages of Open-Ended Funds
a.Suffers from Market Risk
Even though the fund manager of open-ended funds maintains a highly diversified portfolio, they are subject to market risk. The NAV of the fund keeps fluctuating according to the movements of the underlying benchmark.
b.No Say in Asset Composition
Open-ended funds appoint fund managers who are well-qualified and have experience in the field of fund management. They take all the decisions related to the selection of securities for the fund. Hence, the investors do not have a say in deciding the asset composition of the fund.
7.Comparison Between Open-Ended and Closed-Ended Mutual Funds
It is difficult to say whether open-ended funds are better than closed-ended funds or vice versa. The performance of a fund, whether open-ended or closed-ended depends on the fund category, fund management, and investment style.
Some open-ended fund investors are quick to redeem their units after the NAV appreciates by 5%–10% to book short-term profits. This hurts the investors who remain invested in the funds. Closed-ended funds are better options in such situations because the lock-in period prevents early redemption and protects the interest of long-term investors.
Open-ended funds can be useful for someone who has minimal or no knowledge of the markets and desires an annualised return in the range of 12%–15%. As professionals and experts manage these funds, with the NAV being updated daily and highly liquid these get slightly more advantage for investors than the closed-ended funds.