What are open-ended funds?

When we talk about mutual funds, we normally talk about open-ended funds or schemes. An open-ended scheme is available to buy and sell all the time. You can buy and sell the units of the scheme based on its NAV.

For example, if the NAV is Rs 15, you can buy a unit at Rs 15 or sell a unit at Rs 15 minus any exit load. The NAV of the scheme may change daily in line with stock or bond market. The NAV is the value of all investments of a scheme minus its liabilities and fees. The NAV of the scheme would depend on the performance of the investments of the scheme.

If all funds we normally talk about are open-ended schemes, how come many people are not aware of it? In olden days, the mutual fund industry used to have almost equal number of schemes in the open-ended and closed-ended categories.

As said earlier, you could buy and sell units of open-ended schemes at any point after it opens after the new fund offer or NFO. Typically, mutual fund schemes are launched with an NFO. Once it reopens after the NFO period, you can buy and sell the units at any point of time.

Closed-ended funds, on the other works totally different. They are available for purchase only during the NFO period. After the NFO period, the schemes are shut or closed for subscription. After the stated period in the offer document, you can sell the scheme and take your money out of it.

As you can see, the open-ended schemes have a huge advantage as you can buy and sell the units whenever you want. That means, if you suddenly get some money and want to invest, you can invest the money (or buy the units) in a mutual fund. Similarly, if you have a sudden need for money, you can sell the units of the scheme and take the money out.

This naturally gave open-ended schemes an advantage and they started dominating industry. Almost to the point that most investors do not know about the existence of closed-ended schemes. Even though mutual fund houses continue to launch closed-ended equity mutual fund schemes, not many people prefer to invest in them.

This is because unlike open-ended funds, you cannot sell these schemes if they are not performing well. Once you invest in them, you can get out only after the lock-in period is over. Even the scheme is listed on the stock exchange to provide an exit, you may struggle to find buyers for the units. Even if you find one, you may be forced to sell the units at a steep discount to its NAV.

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