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Open-end Mutual Funds or closed: Which type of Mutual Fund should you choose?

Mutual Fund investments open up the avenue of investments in the financial market to the general public, whether they are expert financial planners or novice investors. Investors hold units in a common portfolio of the fund.

The two types of Mutual Fund

Mutual Funds come in different types, equity-based funds, debt funds, balanced funds, income funds, and growth funds. These allow investors to pick schemes that match their goals. They also let investors choose according to their risk appetite.

There is another general division of Mutual Funds, and this is based on their structure and functioning. These are open-end Mutual Funds and close-end Mutual Funds.

Mutual Funds open with a New Fund Offer (NFO) period. During this time, anyone can buy units in these funds. After this NFO period, open and close ended funds take different routes.
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What is an open ended Mutual Fund?

In an open ended fund, units can be bought and sold at any time throughout the life of the fund. These funds also do not have a set tenure. The fund can directly sell or buy units, and also offer new units for sale or repurchase units from investors. Thus, an open ended fund’s corpus can vary, it can grow or shrink depending on how many people are buying and selling.

What is a closed end Mutual Fund?

In a close ended fund, after the NFO period, there is usually no way to directly enter or exit the scheme. These funds have a definite maturity period and their corpus is also fixed. To provide investors with the flexibility to enter or exit the scheme, the close ended schemes are listed on the stock exchange. Thus, units can be bought and sold in the secondary market.
Close ended funds generally cannot offer new units for sale, but they sometimes offer to repurchase units from investors. Only existing units can be bought or sold, so the number of units in a close ended fund remains the same.

The big question: Should you invest in a Closed End or Open End Fund?

Closed end funds have a definite maturity date, so you know when you'll be able to redeem the units. So, are close ended funds better in terms of liquidity? Not really, because you can sell some or all of your units in open end funds at anytime you wish,

Look at the underlying assets of the investment. The investment portfolio can be composed of just equity investments, just debt investments, or a mix of both depending on stated objectives of the fund. Choose according to your tolerance for risks. If you like the idea of a definite period for the investment, close ended funds are the right fund for you.

Close ended Mutual Fund schemes have a definite redemption date. Your returns can be affected by timing. If the market experiences a downturn on the date of maturity, the NAV of the close end fund is also affected and you may get a lesser value for your units on that day.

With an open ended Mutual Fund scheme, you can watch the market and if you feel that most of the investments have reached their peak value, you can sell and get good gains. If you feel that the investments still have potential for growth, you stay on with the fund for longer.

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