Swimming in the ocean versus swimming in a lake can be entirely different experiences. If you swim in the lake, you will be aware of the boundaries of where the lake ends. Put yourself in an ocean, and you could swim for days at length with no piece of land in sight. Mutual fund schemes can be categorised as various types, one of which is their structure – open or closed. The former, just like the ocean, has no boundaries of when to invest or redeem, while the latter does. Find out more about the differences between the two.
Knowing the ocean: What are open-ended funds?
An open-ended mutual fund scheme does not have any lock-in period or maturity. As a result, they are relatively more liquid. They have no limits on the Assets under Management (AUM) and can collect as many investments as they wish. You can buy and sells units of an open-ended mutual fund scheme anytime you want. The Net Asset Value (NAV) is calculated daily and can differ each day. However, there is one exception - the Equity-Linked Savings Scheme (ELSS), which is an open-ended scheme. Yet, these equity mutual funds have a lock-in period of three years.
Knowing the lake: What are closed-ended funds?
A closed-ended mutual fund scheme has a fixed timeline. You can only invest in such a scheme when the New Fund Offer (NFO) is released. One of the features of mutual funds like closed-ended schemes is that they only issue a limited number of units. Your money is invested until the lock-in period gets over, after which the units can be redeemed. When you redeem your investment, the amount will be credited to your bank account based on the prevailing NAV on that day.
Open-ended vs close-ended mutual fund: Where should you swim?
To understand the basics of mutual funds like open-ended and closed schemes and make a choice, you can go through their primary differences below:
| Points of difference | Open-ended mutual fund scheme | Closed-ended mutual fund scheme |
| Investing method | Open-ended mutual fund schemes offer more flexibility in investing. You can invest in them in a lump sum or through a Systematic Investment Plan (SIP). Moreover, you can invest whenever you want, as often or as few times. The choice rests entirely on you. | In the case of closed-ended schemes, the option to invest is only present during the NFO period. Moreover, you can only invest in a lump sum and not through SIPs.
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| Tax savings | ELSS is an open-ended scheme that offers tax benefits under Section 80C. You can claim a tax deduction of up to Rs. 1.5 lakh in a financial year on your investments made in any ELSS fund. However, you must note that even though ELSS is an open-ended scheme, you can withdraw your money only after the lock-in period of three years gets over. | On the contrary, there are no tax benefits for investing in any closed-ended mutual fund schemes.
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| Track records | An open-ended scheme may have a track record or data on past performance that you can refer to before you invest. This can be useful in comparing different schemes when making a choice. | On the other hand, since closed-ended schemes are NFOs, they do not have such data. |
Conclusion
Open-ended and close-ended mutual funds are both mutual funds that can help you meet your financial goals. However, you may pick one based on your goals, risk appetite, liquidity needs, investment budget, investment tenure, etc., The differences stated above can help you make better decisions.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATEDDOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
