Difference Between Open-Ended And Close-Ended Funds (2022)

Difference Between Open-Ended And Close-Ended Funds (1)

Mutual funds

Based on the investment structure, mutual funds in India are of two types: open ended and close ended funds. On the surface, open ended and close ended mutual funds maylook similar. A closer look, however, would reveal some differences between these two types of mutual funds. Before investing, you might want to consider the differences as it is a function of investment flexibility and the ease at which you can buy or sell them.

Difference Between Open-Ended And Close-Ended Funds (2)

Table of contents

  • What Is an Open Ended Fund?
  • What Are Close Ended Funds?
  • Advantages of Open Ended Funds
  • Disadvantages of Open Ended Funds
  • Advantages of Close Ended Funds
  • Disadvantages of Close Ended Funds
  • Differences Between Open Ended and Close Ended Mutual Funds
  • Open Ended or Close Ended Mutual Funds: Which is the Better Pick?
  • Taxation of Open Ended Funds and Close Ended Funds
  • Final Word
  • FAQs on Open Ended and Close Ended Mutual Funds

What Is an Open Ended Fund?

Open end funds are one of the most common forms of investment in India that are always open to investments and redemptions. They are open perennially, meaning they do not come with a certain lock-in period. Therefore, investors can expect flexibility when buying or selling units of this fund.

In addition, this fund’s NAV (Net Asset Value) is evaluated on the underlying securities’ daily value at the end of the day. However, these funds are not traded on stock exchanges.

What Are Close Ended Funds?

In this type of mutual fund scheme, the investments come with a lock-in period. Investors can subscribe to these schemes only during the New Fund Offer (NFO) period and sell units only after the lock-in period or tenure of the scheme is over.

Nevertheless, some Asset Management Companies (AMCs) can transfer the proceedings from a close ended fund after its maturity to another open ended fund. However, they need an investor’s consent to do so.

While drawing differences between open ended and close ended funds, experts argue that the lock-in period concerning the latter ensures the stability of assets. This allows the fund manager to create a portfolio with long-term growth potential. However, in the case of open end funds, there is always a chance of cash outflows during the redemption of units.

Also Read: 10 Best Performing Mutual Funds

Advantages of Open Ended Funds

1. Liquidity

(Video) Open-End and Closed-End Mutual Funds

As an investor of this type of fund, you can sell units of your investment any time you prefer. Hence, mutual funds without a certain lock-in period are known to offer more liquidity compared to funds with a lock-in period.

2. Availability of systematic options

By investing in these funds, individuals can avail several systematic plans for both withdrawal and investment purposes. Some of these systematic plans include the Systematic Withdrawal Plan (SWP), Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP).

3. Track record and past performance

The track record of these funds’ performance across different markets is available to all investors. By going through this data, one can know about the past performance of a fund and make an informed decision.

Disadvantages of Open Ended Funds

1. Affected by market fluctuations

Although fund managers of open ended funds maintain a highly diversified portfolio, these are vulnerable to market risks. Hence, the NAV of such funds fluctuates subject to the movement of the underlying benchmark.

2. Vulnerable to large outflows and inflows

During sudden outflows, a fund manager may be compelled to sell his stocks. In such a case, it can cause a loss to all unitholders in the fund.

Advantages of Close Ended Funds

The close ended mutual funds has its advantages and are as follow:

1. Stability in the asset structure

As this type of fund allows investors to redeem units after the maturity period, it provides fund managers with a stable asset base that is not affected by frequent redemptions.

2. Trade on stock exchanges

Like any other equity fund, close ended funds are also traded on stock exchanges, that is, they can sell or buy units in real-time.

(Video) Open Ended vs Closed Ended Funds (Explained)

3. Flexibility and liquidity

Investors can easily liquidate these funds by selling them on the stock exchanges.

4. Low operating costs

As these funds come with lower turnover rates and marketing costs, their operating and management costs are also relatively low.

Thus, you can invest in a Navi Long Term Advantage ELSS (Equity Linked Savings Scheme) Fund Direct-Growth from Navi AMC and save taxes while aiming for long-term goals. Also, invest in a diversified portfolio with a lock-in period of just 3 years and obtain maximum returns from this fund.

Disadvantages of Close Ended Funds

Before comparing open ended and close ended funds, you may want to consider the limitations of close ended funds:

1. Non-availability of track records

Unlike open ended funds, you cannot check the performance of close ended schemes over different market cycles. Therefore, while choosing a fund, a manager’s expertise plays a major role.

2. You cannot invest through systematic plans

By investing in close ended funds, you only have the option of choosing a lump sum investment mode.

3. Poor performance

These funds are likely to perform poorly than their open ended counterparts historically.

Also Read:

Differences Between Open Ended and Close Ended Mutual Funds

ParametersOpen ended fundsClose ended funds
Maturity periodThey do not have a maturity period.They come with a maturity period ranging from 3 to 5 years.
Fund managementFund managers have to mandatorily stick to the investment objectives. Also, there is pressure on them as investors can redeem units any time they prefer.Fund managers have no additional pressure as the investors’ assets are under a lock-in period.
ListingsThese schemes are not listed on the stock exchange.These are listed on the stock exchange.
Fund sizeFlexible.Fixed.
Transaction timeAt the end of the day.Real-time.
Price determinationShares sold at an NAV declared by the fund.Share prices vary depending on demand and supply.

Open Ended or Close Ended Mutual Funds: Which is the Better Pick?

FeaturesOpen ended fundsClose ended funds
LiquidityHigh liquidity because you can buy or sell units any time you prefer.No liquidity during the lock-in period. You can redeem units once the maturity period is over.
Track recordYou can check the performance track record of these funds before investing.No track record is available.
Investing modeYou can invest in a lump sum or Systematic Investment Plans (SIPs).Investment is possible only during the New Fund Offer (NFO).
Investment amountIndividuals can start investing with low amounts such as Rs.500 or Rs.1000.Rs.5000 is the minimum investment amount for investing in this fund.
Rupee cost averagingDue to the SIP investment mode, you can take advantage of rupee cost averaging.No averaging facility is available as post NFO period you cannot add investments.

Taxation of Open Ended Funds and Close Ended Funds

Open ended and close ended mutual funds have similar tax treatment. Both these funds can invest in equity and debt instruments. In India, the taxation structure is different for equity and debt mutual funds and these funds are considered as equity-oriented funds or debt-oriented funds as per asset allocation. If at least 65% of the investment corpus is allocated to equity and equity-related instruments, these mutual funds are considered as equity mutual funds for taxation. Otherwise, the mutual fund schemes are considered as debt mutual funds for taxation purposes.

(Video) What's the difference between open-ended and closed-ended mutual funds?

In case of equity funds, the gains are subject to STCG tax if the holding period is less than 12 months. The rate of taxation is 15%. In case the holding period is one year or more, the realized returns are subject to LTCG tax. The rate of taxation in the case of LTCG is 10%. Note that capital gains from these funds of up to Rs. 1,00,00 are exempt from LTCG tax.

Now, let’s look at the tax treatment of debt mutual funds. These funds are also subject to LTCG or STCG as per holding period. If the holding period of these periods is less than 3 years, the gains arising from these funds are taxable as per the respective tax slabs. On the other hand, if the holding period is 3 years or more, LTCG tax is applicable at the rate of 20% with indexation benefit.

Also Read: 10 Best-Performing Corporate Bonds In India (2022 Update)

Final Word

Looking back, one may conclude that open ended funds offer more flexibility than close ended ones. However, close ended mutual funds offer more leeway for the fund manager helping them maintain a portfolio that can make long-term gains.

Therefore, the decision of choosing between open ended and close ended funds is entirely up to you. For starters, you might want to refer to the aforementioned section to make an informed decision.

FAQs on Open Ended and Close Ended Mutual Funds

Q1. Can I sell units of an open-ended fund such as the ELSS fund any time I prefer?

Ans: No, ELSS funds come with a lock-in period of 3 years. Therefore, you can buy or sell units after the maturity period.

Q3. How is the Net Asset Value calculated for an open-ended fund?

(Video) What Are Open-Ended and Closed-Ended Funds?

Ans: The NAV is evaluated by subtracting the fund’s liabilities from its assets.

Q4. How are the units of closed-ended funds sold?

Ans: The units of these funds are sold at the fund trading price during the daytime. These investments reflect on market values other than NAV.

Q5. How is tax calculated on closed-ended mutual funds?

Ans: In the case of closed-end funds, tax rates depend on the investment percentage made by the scheme in debt and equity. If 65% of the assets are invested in equity and equity-related instruments, it will be taxed like any other equity fund. Otherwise, it will be taxed just like a debt fund.

Before you go…

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.

About the author

Difference Between Open-Ended And Close-Ended Funds (3)

Navi Team

We are a diverse group of writers, editors and Subject Matter Experts striving to bring the most accurate, authentic and trustworthy finance and finance-related information to our readers. Our mission is to simplify jargon and industry lingo. We believe sharing knowledge through relatable content is a powerful medium to empower, guide and shape the mindset of a billion people of this country.

(Video) How to pass the SIE .. Open end vs Closed End Funds


Why can closed-end funds sell at prices that differ from net value while open-end funds do not? ›

Pricing. Because it's traded on an exchange, a CEF's price is determined by market supply and demand. While open-end funds are bought and sold based on the fund's net asset value (NAV) per share less any applicable sales charges, the price at which a CEF is bought or sold may be higher or lower than its NAV.

Are closed-end funds less liquid than open-end funds? ›

Because there are only a limited number of shares available, closed-end funds have less liquidity. You can only sell your shares if a buyer is available, and shares don't always trade at NAV.

What is mutual fund distinguish between open ended and close ended MF schemes? ›

Open Ended Vs Close Ended Mutual Fund Schemes
Open-ended fundsClose-ended funds
Redemption happens at NAV that changes daily depending on the value of the portfolio at the end of the day.NAV is determined at the time of the NFO. Upon maturity, scheme itself is dissolved and capital returned at NAV on that date.
8 more rows
15 Dec 2021

Why do closed ended funds have lower cash requirements than open-end funds because? ›

Closed-end funds have lower cash requirements than open-end funds because: open-end funds allow investors to redeem their shares at any time. closed-end funds have limited lifetimes.

What is the difference between open-end and closed-end? ›

A closed-end fund has a fixed number of shares offered by an investment company through an initial public offering. Open-end funds (which most of us think of when we think mutual funds) are offered through a fund company that sells shares directly to investors.

Which is better open ended or closed ended? ›

Unlike close-ended questions, open-ended questions have a broad focus and allow respondents to provide extensive answers. They also give you better insights into the thoughts, expectations, and experiences of the respondent since they can freely express themselves.

What advantages do open-ended funds have over closed ended funds? ›

These funds are usually not traded on stock exchanges. The big difference between open ended and closed ended mutual funds is that open-ended funds always offer high liquidity compared to close ended funds where liquidity is available only after the specified lock-in period or at the fund maturity.

Are closed-end funds riskier than open-end funds? ›

Closed-end funds are considered a riskier choice because most use leverage. That is, they invest using borrowed money in order to multiply their potential returns.

Why are closed-end funds good? ›

Closed-end funds tend to pay out higher dividends to investors in part because they use leverage to help boost returns. Again, that works well in a rising market, less so in a falling one.

What determines the difference between open and closed ended credit? ›

The main difference between open-end credit and closed-end credit is this: Closed-end credit is taken out once, and has a specific repayment date; open-end credit, like credit cards, can be drawn from again and again, and there's no fixed due date for paying the balance in full.

Which statement is true about closed-end funds? ›

Which statement is TRUE about closed end funds? The best answer is D. Because closed-end funds trade like stocks, the fund's pricing is reflective of investor's sentiment towards the fund. The fund can trade at a discount to Net Asset Value when investors become disenchanted with the fund.

What is a characteristic of closed-end funds? ›

A closed-end fund generally does not continuously offer its shares for sale but instead sells a fixed number of shares at one time. After its initial public offering, the fund typically trades on a market, such as the New York Stock Exchange or the NASDAQ Stock Market.

What is an example of a closed-end fund? ›

Closed-end funds are investment vehicles with shares listed on multiple global stock exchanges, like the New York Stock Exchange and the London Stock Exchange, that essentially trade like stocks.

What is the meaning of an open-ended? ›

1. not having fixed limits; unrestricted; broad. an open-ended discussion. 2. allowing for future changes, revisions, or additions.

What is an example of a open-end fund? ›

Examples of open-end funds include traditional mutual funds, hedge funds and exchange-traded funds (ETFs), which are funds that trade on an exchange like a stock.

What is the difference of open-ended and closed questions with examples? ›

Open-ended questions are broad and can be answered in detail (e.g. "What do you think about this product?"), while closed-ended questions are narrow in focus and usually answered with a single word or a pick from limited multiple-choice options (e.g. "Are you satisfied with this product?" → Yes/No/Mostly/Not quite).

How do you answer open-ended questions? ›

Answers to open-ended questions should be in-depth and specific, but still concise. Avoid going off topic and providing lengthy answers as this can increase the risk of going off-topic. The interviewer may also lose attention if your answers are too long.

Why is it better to use an open-ended question? ›

Open-ended questions give your respondents the freedom and space to answer in as much detail as they like, too. Extra detail really helps to qualify and clarify their responses, yielding more accurate information and actionable insight for you.

Do closed-end funds expire? ›

For many years, all closed-end funds (CEFs) were structured as perpetual funds, meaning they have no “maturity” or termination date. The introduction of CEFs with defined terminations — term and target term funds — has created additional opportunities for investors.

What happens to close ended mutual funds after maturity? ›

Once the NFO (New Fund Offer) period ends, investors cannot purchase or redeem units of a closed ended fund. These funds are launched via an NFO and subsequently traded in the market like stock and have a fixed maturity period.

Why is it called a closed-end fund? ›

A closed-end fund is a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange but no new shares will be created and no new money will flow into the fund.

Can closed-end funds issue more shares? ›

As a result, closed-end funds may trade at discounts or premiums to the underlying market value of the portfolio. In addition, closed-end funds, unlike ETFs, may issue debt or preferred shares to raise additional capital to purchase more securities for its portfolio.

Are closed-end funds taxable? ›

Excluding a handful of exceptions, CEFs themselves do not pay taxes. Instead, like open-end mutual funds and ETFs, CEFs pass the tax consequences of their investments onto their shareholders.

Do closed-end funds have fees? ›

If you buy or sell closed-end fund shares on a securities exchange, you will pay a typical brokerage commission, but not any sales loads or purchase or redemption fees. Regardless of whether you purchase your shares in an initial offering or on a securities exchange, you will pay for the fund's operating expenses.

What happens to closed-end funds when interest rates rise? ›

For closed-end funds, interest rate hikes can create higher borrowing costs for funds that use leverage (i.e., those that issue preferred shares). Higher borrowing costs could lead to lower earnings and eventually distribution cuts.

What happens when a closed-end fund closes? ›

A closed fund may stop new investment either temporarily or permanently. Closed funds may allow no new investments or they may be closed only to new investors, allowing current investors to continue to buy more shares. Some funds may provide notice that they are liquidating or merging.

How are closed-end funds valued? ›

The NAV of a closed-end fund is calculated by subtracting the fund's liabilities (e.g., fund expenses) from the current market value of its assets and dividing by the total number of shares outstanding.

What is the difference between open end credit and closed-end credit quizlet? ›

Open end credit is when a borrower can spend up to a certain amount. This has varying payment depending on how much you spend. One example of open end credit is credit cards. Closed end credit is a loan for a stated amount that must be repaid in full by a certain date.

What are the advantages and disadvantages of open end credit and closed-end credit? ›

Pros and Cons of Open-End Credit
Credit card account holders may avoid interest charges by paying statement balance in fullCan include high interest rates and fees
Account holders may only pay interest on what they borrowHigh credit usage and minimum payments can lead to high debt burden
2 more rows
17 May 2022

What is the difference between open ended? ›

What's the difference between closed-ended and open-ended questions? Closed-ended, or restricted-choice, questions offer respondents a fixed set of choices to select from. These questions are easier to answer quickly. Open-ended or long-form questions allow respondents to answer in their own words.

Are closed-end funds fixed income? ›

Historically, most closed-end funds specialize in either fixed-income or equity securities and follow a pre-determined investment objective, such as current income or capital appreciation.

What does closed ending mean? ›

The definition of closed-ended is describes a situation or question that has a predetermined number of outcomes. An example of closed-ended is the question "do you need help?" which typically only has four answers - yes, no, maybe or don't know.

Why closed-end funds can sell at prices other than the fund's net asset value NAV? ›

Because closed-end funds trade on a public exchange, the price of the units will be determined by the market. As such, at any point in time the price may trade at either a premium or discount to the stated NAV.

Why is closing price different from opening price? ›

During a regular trading day, the balance between supply and demand fluctuates as the attractiveness of the stock's price increases and decreases. These fluctuations are why closing and opening prices are not always identical.

Why are closed-end funds sold at discount? ›

The signaling hypothesis argues that closed end fund discount exists due to asymmetric information between fund managers and investors.

Why open price is higher than close price? ›

Definition: It is the price at which the financial security opens in the market when trading begins. It may or may not be different from the previous day's closing price. The security may open at a higher price than the closing price due to excess demand of the security.

What is the benefit of closed-end funds? ›

Closed-end funds (“CEFs”) can play an important role in a diversified portfolio as they may offer investors the potential for generating capital growth and income through investment performance and distributions.

How long do closed-end funds last? ›

For many years, all closed-end funds (CEFs) were structured as perpetual funds, meaning they have no “maturity” or termination date. The introduction of CEFs with defined terminations — term and target term funds — has created additional opportunities for investors.

What is the difference between open and closed market? ›

In a closed market transaction, a company employee buys or sells stock options or shares to the company. The details of this trade are documented by the SEC and it is between the insider and the company. On the other hand, an open market transaction involves the stocks or shares available through the open exchange.

Why is open and close price important? ›

Also known as the “open” and “close,” these price levels provide significant reference points to gauge strength & identify important price levels to help confirm trading ideas or biases.

How is open close price calculated? ›

The closing price is calculated by dividing the total product by the total number of shares traded during the 30 minutes. So your closing price is Rs 13.57 (Rs. 95/7). You last trading price is, however, Rs 20, which is the price at which the stock was traded last.

Can closed-end funds be sold? ›

You can buy or sell closed-end funds through all types of brokerage firms, including full-service brokers, discount brokers and on-line (Internet) brokers. In each case, you pay your brokerage firm a commission for the services provided.

Do closed-end funds pay dividends? ›

Like mutual funds, closed-end funds pay out their earnings to shareholders in two ways: Income dividends pass through to shareholders the interest or dividends collected by the fund, net of expenses.

Why closing price is most important? ›

The Closing Price helps the investor understand the market sentiment of the stocks over time. It is the most accurate matrix to determine the valuation of stock until the market resumes trading the next day.

Is it better to buy at market open or close? ›

Professional traders know that the stock market open is one of the best times of the day to buy and sell stocks.

Why open price is important? ›

The opening price is an important marker for that day's trading activity, particularly for those interested in measuring short-term results such as day traders.


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