What is the difference between open ended and closed ended mutual funds?
Investment in shares is one risky adventure and without knowing the tricks and techniques, an investor may not be able to take advantage of investing in shares and investment in mutual funds helps them invest within a safety net.
Mr. Kumar is one among such investors and recently he was able to get reasonable amount on account of sale of one old building held in the name of his father. He thought of investing in growth shares and since he was not willing to take any risk by directly investing in shares, he thought of investing the amount in mutual funds. He visited M/s Sharecorp, an investment agency situated nearest to his house. Mr. Ganeshram, the manager of M/s Sharecorp was very kind enough to offer him able guidance in this connection.
There was a fruitful discussion between Mr. Kumar and Mr. Ganeshram about open ended and closed ended scheme of mutual fund.
What do you mean by open ended and closed ended fund?
Mr. Ganeshram: There are different categories of mutual fund schemes ; however, depending upon the maturity, the scheme can be either classified as open ended scheme or closed ended scheme. An open ended scheme is one scheme which is available for subscription and repurchase throughout the year. When it comes to closed ended scheme, it has a definite maturity period namely; five years; seven years etc.,
Kumar: What are the key features of open ended scheme?
Ganeshram: Open ended fund schemes do not have a maturity period. If you are willing in one such scheme, you can invest today itself subject to certain formalities. You can purchase the units at NAV. NAV means net asset value and you can also sell the units at the current net asset value. Net asset values are declared on a daily basis and the key element in the case of open ended scheme is its liquidity. It is almost like a bank fixed deposit and in case you are in need of urgent money, you can immediately sell some units and within a short period the units will be sold and the amount will be credited to your savings account.
What are the salient features of closed ended scheme?
Ganeshram: Unlike open funded scheme, the closed ended scheme has a definite maturity period. Normally such schemes are available for subscription at the time of launch of the scheme only. You can purchase the units during the initial offer at the offer price. Thereafter you can buy or sell the units in those schemes only through stock exchanges where such schemes are listed. This apart, the repurchase facilities are made available by means of exit routes to the investors at limited intervals by providing sufficient information and the investors who are willing to repurchase the units can make use of such exit routes during such offer period. As per SEBI guidelines, the investors should be either given an opportunity to repurchase the units either through stock exchanges or through exit routes announced at periodical intervals. The net asset values of these types of schemes are announced normally on a weekly basis.
Please share your views on open ended and closed ended funds.