Apart from risk attributes, investment philosophy, and type of investment, mutual funds can also differ in their structure. Open-ended and close-ended mutual funds differ in aspects of flexibility, ease of purchase, and sale of the fund units. Close-ended investment is made into a fixed number of shares, which are traded on the stock exchange.
What is Close-Ended Investment?
What are Close-Ended Funds?
Close-ended funds are launched via Initial Public Offering (IPO) and are traded just like stocks. These are also bought and sold through managers or brokers, who control where to invest the proceeds, be it in bonds, stocks, or some other financial asset.
Close-ended funds also have a fixed period. An investment can be made only during a new fund offering, and it cannot be redeemed before the end of the tenor.
It is the added flexibility of open-ended funds that have made them popular among investors, but with the changing financial industry, close-ended investments too are being considered as a good investment option. The fixed period which seemed to be a constraint is now turning out to be the blessing in disguise for close-ended investors, owing to market volatility.
Even flexible redemption isn’t an advantage exclusive to open-ended funds now, with several financial institutions providing the facility of easy money at the times of cash crunch.
Recommended Read: Direct Plans vs Regular Plans in Mutual Funds !!!
Advantages of Close-ended Investment:
People, that is, investors, are likely to redeem their investment during the times of a volatile market. This volatility is often followed by a rebound, and in such a situation, investors face a hard time in re-investing in a rising market. Close-ended investment address this concern quite effectively as the fixed period allows the investors to escape any behavioural bias caused by a volatile mind.
Another advantage of close-ended funds is asset value and pricing. The shares in these funds are often available for purchase at a discount due to a lower current price than their net asset value. The net asset value (NAV) is the worth of the fund’s assets at current market prices. The current price is determined by the market depending upon the demand and supply of the share. Thus, the current price can be lower or higher than the NAV, and in case of lower, the shares can be bought at a discount.
Therefore, those looking to foray into the financial market need not lose sleep over the constant attention it demands. While open-ended funds do need you to be on your toes, the risk and time requirement are both lower with close-ended funds. Being managed by brokers and requiring attention only after maturity, close-ended funds are sure a great investment option for those with a packed schedule.
Recommended Read: How to decide whether to continue with a Mutual Fund or Exit it?
Are close-ended funds better than Fixed Deposits (FDs)?
Both FDs and closed-ended funds have a fixed tenor, and the similarity ends there. Closed-ended funds seem lucrative, but they still come with market-linked risks. Close-ended funds require lump-sum investments. However, with no guarantee on returns or the maturity period you could end up losing your principal amount.
FDs in comparison are safe and assure returns determined at the time of investment. Bajaj Finance Fixed Deposit provides one of the best interest rates in the market. You can calculate your FD gains by using the online Fixed Deposit Interest Calculator.