Open ended and close ended funds

Mutual funds are investment vehicles that pool money from various investors to purchase a diversified portfolio of securities such as stocks, bonds, and other assets. There are two types of mutual funds: open-ended funds and closed-ended funds.

Open-ended funds are the most common type of mutual fund. They are called “open-ended” because they issue and redeem shares on a continuous basis, meaning investors can buy and sell shares at any time. This means that the total number of shares outstanding can change based on investor demand. Open-ended funds are also known for their liquidity, as they are designed to be easily bought and sold on the open market. The price of an open-ended fund is determined by the net asset value (NAV), which is calculated by dividing the total value of the fund’s assets by the total number of outstanding shares.

In contrast, closed-ended funds issue a fixed number of shares through an initial public offering (IPO). Once the shares are sold, they trade on a stock exchange like any other stock, and investors can buy or sell them through a broker. Unlike open-ended funds, the number of shares outstanding does not change based on investor demand. The price of a closed-ended fund is determined by supply and demand in the market, and can trade at a premium or a discount to the NAV. Closed-ended funds are less common than open-ended funds, but they can provide unique investment opportunities in areas like real estate or private equity.

Open Ended Schemes

Mutual funds are mostly ‘open-ended’ investment funds, meaning that new investors can contribute money to the fund at any time, and existing investors can return their units or shares to the fund for redemption at any time. When investors redeem their units or shares of a mutual fund they receive a cheque based on the current market value of the mutual fund’s portfolio.

These are mutual fund schemes which offer units for purchase and redemption subscription on a continuous basis. In other words, the units of these schemes can be purchased or redeemed at any point of time at Net Asset Value (NAV) based prices. Also, these schemes do not have a fixed maturity period and an investor can redeem his units anytime.

Close Ended Schemes

Close-ended schemes are mutual fund schemes which have a defined maturity period e.g. 1 year/5 years etc. The units of close ended scheme can be bought only during a specified period at the time of initial launch. SEBI stipulates that all close-ended schemes should provide for a liquidity window to its investors. These schemes are either required to be listed on a recognized stock exchange or provide periodic repurchase facility to investors.

Equity Funds (or any Mutual Fund scheme for that matter) can either be open ended or close ended. An open ended scheme allows the investor to enter and exit at his convenience, anytime (except under certain conditions) whereas a close ended scheme restricts the freedom of entry and exit. Regulations drafted in India however permit investors in close ended funds to exit even before the term is over.