Mutual funds are one of the popular types of investment which is preferred by millions of people worldwide, owing to the diversity they offer at a low cost. Mutual funds are categorized on the basis of their characteristics which include the risk factor, the nature of the investment and the principle on which the investment is being made, among a few others. Beside the aforementioned characteristics, mutual funds are distinguished depending on their structure i.e. open end mutual fund or close end mutual fund. One can differentiate between these two types of funds on the basis of the flexibility in terms of sale and purchase of the fund units.
What are Open-end Funds?
Open-end mutual funds are the type of funds which have no restrictions in terms of the amount of shares which the fund can issue. These funds are like a collective investment scheme where the investor can buy shares directly from the fund instead of the existing shareholders. Open end funds form a majority in the mutual fund market and are popular in many countries. The issue price of an open-ended fund is a direct indication of the share’s performance as these funds are issued and redeemed on the basis of their net asset value (NAV). Open-ended funds are an easy yet valuable tool for investors looking to invest. A majority of open-ended funds are managed actively where the portfolio manager chooses the securities to be purchased. Once the fund has accumulated total assets which may not be easily manageable or may hamper the objective of the fund, the fund manager can decide to close the fund to new investors. In some cases, the fund may be closed to further investment even by existing fund investors.
What Are Close-end Funds?
Close-ended mutual funds, also known as CEF function on a collective investment arrangement where a fixed number of shares are issued to the public by way of an initial public offering (IPO). Following this, the shares of the fund are purchased and sold on the stock exchange. However, unlike open-ended shares, where new shares may be created by the managers to meet the demand, in close end funds, no new shares are issued to meet the demands of the investors. Also, there is no obligation to redeem the remaining shares. Close-ended funds function in a manner which is very similar to stocks and the shares of the fund can only be purchased and sold on a recognized stock exchange. The price of shares under close-ended funds is decided by the market and is
The price per share is determined by the market demand and is typically not the same as the net asset value (NAV) or underlying value of each share of the fund’s investments. Therefore, the shares will be available either above (at a premium) or below (at a discount) their net asset value (NAV).
Difference Between Open-end & Close-end Mutual Funds
The similarity between open ended funds and close ended funds is that both these funds consist of a portfolio of securities like bonds, stocks, etc., which are managed by a qualified professional. One must buy shares if they wish to invest in either of these funds. However, those are the only similarities between these two funds.
The most important point of difference between open ended and close ended funds lies in the number of outstanding shares. In open ended funds, the amount of outstanding shares can change drastically with each day. However, in close-ended funds, the shares are limited in number.
Open end mutual funds permit the issue of new shares and redemption of old shares if the same is needed to meet the demands of investors. This depends on whether monetary additions are being made to the fund or old shares are being repurchased. The price of each share is decided on the basis of the total value of all the assets held under the fund, which is divided by the number of shares.
However, in close ended funds, only a fixed number of shares are issued. Purchase of new shares is not allowed. Instead, investors can purchase existing shares help by other investors. These shares are usually exchanged in an open stock exchange where they are sold either above or below their net asset value (NAV) based on the demand.Disclaimer
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.