According to the Association of Mutual Funds in India (AMFI), mutual funds in India account for only 11 per cent of GDP (equity 4 per cent and debt 7 per cent), as against the global average of 62 per cent. This shows that India’s mutual fund business still has a lot of room for growth.
Every mutual fund (NFO) starts with a new fund offering. If an investor applies for a mutual fund scheme, he/she will receive the fund units at the NFO price. An open-ended fund is created after the NFO is exhausted. It allows investors to join and leave the fund after it is established.
in India,
mutual funds
Based on their investment structure, they are divided into two types: they are either open-ended or closed-ended. So, before moving on to the differences, let us understand what is meant by open-ended and closed-ended mutual funds.
What are Open Ended Mutual Funds?
When you hear the term, you are not entirely wrong if you think of an open-end fund as a mutual fund. since a
mutual fund A form of open-ended fund, this is the case. Three hedge funds and exchange traded funds (
ETFs) are examples of open-end investments. These are provided through equity funds, which sell shares directly to each investor. Outside the United States, open-ended funds are SICAV in Europe and OEIC or unit funds in the United Kingdom.
During the day, open-ended funds are traded at scheduled times by the fund managers. Open-ended funds have no limit on the number of shares they can issue, which means the shares are unlimited. As long as there is interest in the fund, the shares will be issued. As a result, when investors buy new shares, the investment company creates new shares to replace them.
Open-ended fund prices are determined at their NAV once a day and reflect the fund’s performance. To arrive at this figure, the fund’s assets are subtracted from its liabilities. On that particular day, it is the only price during which the fund shares can be acquired.
Benefits of open-ended mutual funds
- An open-ended mutual fund has a good level of liquidity, allowing you to redeem your units whenever you want. Unlike other forms of long-term investments, open-ended funds allow redemption at the current Net Asset Value (NAV).
- The past performance of the fund is available in case of open-ended funds. As a result, investing in open-ended funds is a wise choice.
- For many salaried individuals, open-ended funds are a viable investment option. This is because they can invest through a Systematic Investment Plan (SIP).
Disadvantages of open ended mutual funds
- Open-ended funds are sensitive to market risks, even if the fund manager maintains a well-diversified portfolio. A fund’s NAV fluctuates in response to changes in the underlying benchmark.
- Fund managers are appointed by open-ended funds to make all decisions regarding the purchase of securities for the fund. As a result, investors have no input into the fund’s asset structure.
What are Close-Ended Mutual Funds?
Your investment in a closed-ended mutual fund gets locked in for a stipulated time. Close-ended plans can be subscribed only during the New Fund Offer Period (NFO), and units can be redeemed only after the lock-in period or the term of the scheme is over.
According to the Association of Mutual Funds in India (AMFI), the total assets under management (AUM) of closed-end schemes is about 9.5 per cent of the AUM of open-ended schemes, which is Rs 20.07 trillion (as on September 30, 2018). .
However, some closed-ended funds become open-ended after the lock-in period is over, or the AMC may transmit the proceeds of the closed-ended fund to another open-ended fund after the maturity period. However, this requires the approval of investors of closed-ended funds.
Although the NAV determines the value of the fund, the actual price of the fund is determined by supply and demand. Thus, it can trade at prices above or below its actual value. As a result, closed-ended funds can trade at a premium or discount to their net asset values ​​(NAVs). Brokers are used to buy and sell closed-ended fund units.
Close-ended mutual funds trade at a discount to the value of their underlying assets. These funds also have a stipulated maturity date.
Advantages of Close-Ended Mutual Funds
- In a closed-ended fund, investors can redeem their units only on pre-determined dates, such as the maturity of the fund. It provides portfolio managers with a consistent asset base that is not prone to periodic redemptions. A stable asset base makes it easy for the fund manager to make investment plans. In case of fixed asset bases, fund managers can also keep in mind the overall objectives of the fund without worrying about inflows and outflows.
- Close-ended funds, like equity shares, are traded on stock exchanges. It allows investors to buy and sell fund units based on real-time prices that may be higher (premium) or lower (discount) than the fund’s NAV.
- Investors can liquidate closed-ended funds as per the rules of the fund. They could buy and sell closed-ended fund units at market prices during the trading day using accessible real-time pricing.
Disadvantages of Close-Ended Mutual Funds
- The lock-in period of closed-ended funds, which is supposed to give fund managers more flexibility in allocating funds without fear of outflows, has not helped much in improving returns.
- Close-ended funds need to add a lump sum investment when they first start trading. This may not always be a prudent way to handle your investments.
- The track record in case of closed-ended funds has not been provided. As a result, investing in closed-ended funds carries risks that you can only rely on the fund manager to mitigate.
Difference between open-ended and closed-ended mutual funds
It is impossible to conclude whether open-ended funds are better than closed-ended funds. Whether a fund is open-ended or closed-ended, its success is determined by its category, management and investment strategy. Here are some of the differences between open-ended and closed-ended mutual funds.
Redemption Pressure: The fund manager must maintain liquidity in both open-ended and closed-ended mutual funds, and these assets can offer suboptimal returns on occasion. This has the potential to reduce the returns of the fund. During periods of intense market turbulence, redemption pressure can be significant. One of the advantages of closed-ended funds is that the fund manager can take a long-term approach by investing in an asset that can give good returns over the long term as there is no redemption pressure from market sell-offs.
Availability: Open-ended funds can be bought and sold at any time, but closed-ended funds can be bought only during NFO (New Fund Offering) or after getting listed on the stock exchange. On the other hand, an open-ended fund remains open for subscription long after the closure of the NFO, and the units can be redeemed whenever the investor wishes.
Furthermore, a close-ended scheme lapses after the maturity date has passed, and money is paid out to the customers based on their holdings. After maturity, closed-ended funds can be converted into open-ended funds only in some cases.
Fixed Corpus: Close-ended funds have a fixed corpus and a term that usually ranges from three to five years, whereas open-ended funds may not have a fixed maturity or corpus. If you want to invest in closed-ended funds, you should be prepared to keep your money aside for a certain period of time. On the other hand, an open-ended fund allows you to buy and sell whenever you want. The corpus of an open-ended fund changes due to frequent buying and selling, but the corpus of a closed-ended scheme is fixed at a specified limit.
Buying and Selling Units: The number of outstanding shares in an open-ended mutual fund fluctuates continuously due to the fund house’s continuous sale and repurchase of units in response to investor requests. Units of closed-ended funds are traded on exchanges after the conclusion of a new fund offering (NFO), which is similar to an initial public offering (IPO) in the stock market, in which investors can subscribe to the issue for the first time. Huh. Buying and selling closed-ended fund units is almost identical to buying and selling equity. Use Axis Bank Mutual Fund Calculator to know how much return you will get from selling the units.
tax benefits: There is no tax benefit from investing in open-ended mutual funds for total income deduction. Equity Linked Savings Scheme (ELSS), investment in a closed-ended mutual fund, offers tax benefits up to Rs 1,50,000 under Section 80C of the Income Tax Act, 1961.
Unit Price: The NAV, declared by the AMC at 8 pm at the end of a business day, is the price at which an investor buys or sells shares of an open-end mutual fund. Units of a closed-ended fund can trade at a premium or discount to the NAV, depending on the investor’s expectations regarding the fund’s future performance and prospects. If many investors want to buy shares of a closed-ended fund, but only a few units are available for sale, an investor may be willing to sell their units at a price higher than the current NAV.
Change in Unit Capital: Due to major, frequent transactions, open-ended funds are required to sell or repurchase units at the request of the investor at any moment. The unit capital of the fund does not remain fixed. In case of closed-ended funds, the unit capital of the fund remains the same post NFO as the total number of outstanding units remains the same even if those units are traded on the exchanges.
Requirement of Demat Account: An investor does not require a demat account to buy or sell open-ended fund units through a fund house. An investor should open a demat account and execute the transaction through a broker or financial advisor to trade the units of a closed-ended fund post NFO.
Transaction charges: For open-ended funds, an investor who buys or sells units through the fund house does not have to pay any separate brokerage charges. In the case of closed-ended funds, an investor who buys or sells units through a stock exchange will almost certainly produce a sales commission to the broker at the time of the transaction.
ground level
There are other technical differences that exist between the two types of funds, but are most important when deciding whether one should invest in closed-ended or open-ended mutual funds, or both.
It is impossible to conclude that open-ended funds are better than closed-ended funds or vice versa. Whether open-ended or closed-ended, the success of a fund is primarily determined by its category, management and investment strategy.
To record short-term gains, some open-ended fund investors are ready to redeem their units after the NAV rises from 5 per cent to 10 per cent. This is bad news for investors who are loyal to the fund. In such cases, closed-ended funds are preferable as the lock-in period prevents early redemptions and protects the interests of long-term investors.
Open-ended funds can be beneficial for someone who has little or no experience in the market looking for 12 percent to 15 percent annual returns. Since professionals and experts manage these funds, the NAV is updated daily and is very liquid. They have a slight edge over close-ended funds for investors. Thus, find out the best mutual funds with the help of Axis Mutual Fund Online Investing, where you can see the returns you get for each investment.
Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.