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What is the difference between an open ended scheme and a close ended scheme in a mutual fund?
Open-ended funds: These funds buy and sell units on a continuous basis and, hence, allow investors to enter and exit as per their convenience. The units can be purchased and sold even after the initial offering (NFO) period (in case of new funds). The units are bought and sold at the net asset value (NAV) declared by the fund.
Closed-ended funds: The unit capital of closed-ended funds is fixed and they sell a specific number of units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its NFO period is over. This means that new investors cannot enter, nor can existing investors exit till the term of the scheme ends. However, to provide a platform for investors to exit before the term, the fund houses list their closed-ended schemes on a stock exchange.
You can invest in Open ended mutual funds at any time.
However, closed ended mutual funds are accept investments only during a specified period.
Thanks Shishir n Karan.
should there be any preference while buying one. Is it aafe to say that closed ones gives better return than the open ones.
The price of Open ended mutual fund is simply its NAV
However, the price of closed ended mutual funds is not only based on NAV. As these are only issued once - their supply is restricted. The price in such cases also depends on demand and supply apart from the NAV
Closed ended mutual funds are more like IPO of a Company.
As their is an impact of demand and supply on the prices of Closed ended mutual funds, these are slightly more riskier than the Open ended mutual funds. The presence of this factor may lead to additional appreciation/ depreciation in your return.
Higher the Risk, higher the return.
Open ended mutual funds are safer in this case as their price only depends on the NAV of the Mutual Fund.
Close-ended scheme in a mutual fund is like an IPO with a fixed number of shares.
If you intent to make investment, you dont directly purchase it from the issuer and instead, you purchase existing shares from other investors.
Closed-end funds are typically more volatile and behave more like individual stocks.