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When investing in mutual funds, one can invest in either open-ended funds or close-ended mutual funds. Owing to the different features under these two categories, such funds may be suitable for different types of investors.
Open-ended funds are such schemes that remain open for transactions by the investors across all periods. As such, the investors may invest into or redeem out of such schemes on any business day. Further, such schemes do not carry any fixed maturity period, making it flexible for the investors to align such investments with their financial goals. Most of the schemes available for the investors are open-ended funds, as also evident from industry data as of 31st March 2021, which shows that more than 95% of the industry AUM is invested in open-ended schemes (Source: AMFI – Association of Mutual Funds in India). Since there is no restriction on investing in open-ended funds, one can invest in such schemes either through lump sum or Systematic Investment Plans (SIPs). Given the flexibility to transact under such funds, the liquidity for such funds is assured through mutual fund houses. When one transacts in open-ended funds, the transaction happens at the prevailing Net Asset Value (NAV).
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Close-ended funds are such schemes that stay open for direct investment by the investors only for a specified period and come with a defined maturity date. Examples of close-ended funds are Fixed Maturity Plans (FMPs). Similarly, some thematic funds are also launched with fixed maturity, to capitalise on the investment opportunities with a clear investment horizon. Thus, such schemes are useful when the investor’s financial goals are aligned with the maturity period of such schemes or if the investor needs to take advantage of the special tax rates for mutual fund investments. One can choose to invest in close-ended funds only in lump sum mode. While the transactions through mutual fund houses are restricted in close-ended funds, such funds are listed on stock exchanges to provide liquidity to the investors. One can choose to transact in such funds through stock exchanges, even while the liquidity may be low. The investor may need to liquidate such investments at a value lower than the prevailing NAV. Such difference due to liquidity issues is referred to as the impact cost and is commonly witnessed for close-ended funds due to low liquidity at stock exchanges.
The investors may consider investing in different funds, whether open-ended or close-ended, depending upon their suitability to the financial plans.
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