{"id":202,"date":"2009-01-17T21:56:03","date_gmt":"2009-01-17T16:26:03","guid":{"rendered":""},"modified":"2009-06-12T13:39:23","modified_gmt":"2009-06-12T08:09:23","slug":"Close-ended-vs-open-ended-mutual-funds-MFs","status":"publish","type":"post","link":"http:\/\/www.raagvamdatt.com\/Close-ended-vs-open-ended-mutual-funds-MFs\/","title":{"rendered":"Close Ended vs Open Ended Mutual Funds (MFs)"},"content":{"rendered":"<p>Mutual funds (MFs) are of two types \u2013 close ended and open ended. But what is the difference between these? If we do a close-ended versus open-ended comparison, is one better than the other? Is there any advantage in opting for one over the other?<\/p>\n<p>This article explains what these are, and compares these two types of MFs.<br \/>\n<!--more--><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<table>\n<tr><!-- Row 1 --><\/p>\n<td>\n<p><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-8580636079496870\";\n\/* 250_250_In_Article *\/\ngoogle_ad_slot = \"4765524919\";\ngoogle_ad_width = 250;\ngoogle_ad_height = 250;\n\/\/-->\n<\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"http:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/p>\n<\/td>\n<p><!-- Col 1 --><\/p>\n<td>\n<p>We all know what mutual funds are: They collect small amounts of money from many common investors like you and me, and collectively invest it using their expertise.<\/p>\n<p>(Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article56.html\"><b><u>Direct investment in Stocks versus Mutual Funds (MFs)<\/u><\/b><\/a>\u201d to know about the advantages and disadvantages of investing through a mutual fund)<\/p>\n<\/td>\n<p><!-- Col 2 --><br \/>\n  <\/tr>\n<\/table>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p>There are many ways in which MFs can be categorized \u2013 for example, equity or debt is one way. Another way to classify MFs is based on them being open ended or close ended.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>What is an open ended mutual fund (MF)?<\/b><\/p>\n<p>Open ended MFs are more common compared to close ended MFs.<\/p>\n<p>In open ended MFs, the fund house continuously buys and sells units from investors. New units are created and issued if there is demand, and old units are eliminated if there is redemption pressure.<\/p>\n<p>There is no fixed date on which the units would be permanently redeemed or terminated.<\/p>\n<p>If you want to invest in an open ended fund, you buy units from the fund house. Similarly, when you redeem your units, the fund house directly pays you the value of the units.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-8580636079496870\";\n\/\/ArticleLinkList\ngoogle_ad_slot = \"0928256543\";\ngoogle_ad_width = 468;\ngoogle_ad_height = 15;\n\/\/--><\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"http:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Advantages of an open ended mutual fund (MF)<\/b><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>Larger Participation<\/i><\/b><\/p>\n<p>There is no limit on the number of units that can be issued \u2013 new units can easily be created and issued. Therefore, a large number of investors can participate in a MF scheme that is performing well.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>More choices<\/i><\/b><\/p>\n<p>Since open ended MFs are more prevalent compared to close ended MFs, there are many MF schemes to choose from in case you want to invest in an open ended mutual fund.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>No issue expenses<\/i><\/b><\/p>\n<p>(This used to be an advantage due to an anomaly with close ended schemes, but SEBI took corrective action in January 2008, and <b><i>this is no more an advantage<\/i><\/b> for open ended schemes).<\/p>\n<p>Fund houses can charge upto 6% of the amount raised as initial issue expense (more details later) for close ended MFs.<\/p>\n<p>Open ended schemes do not have any such issue expenses \u2013 they only have an entry load, which is much lesser (around 2.25%) in most cases. Thus, more of your money is actually invested.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-8580636079496870\";\n\/\/ArticleLinkList\ngoogle_ad_slot = \"0928256543\";\ngoogle_ad_width = 468;\ngoogle_ad_height = 15;\n\/\/--><\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"http:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Disadvantages of an open ended mutual fund (MF)<\/b><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>Large cash positions and Impact on returns<\/i><\/b><\/p>\n<p>The fund managers have to be prepared for redemptions at all times. At any time, investor can surrender the units and redeem them.<\/p>\n<p>Selling well-performing shares to meet redemptions is not a good strategy. Therefore, most open ended MFs keep a large balance of cash to meet any redemption pressure.<\/p>\n<p>Since this cash is not invested in equities, and is kept either as cash or is invested in very liquid money market funds, it earns very low returns. Therefore, the overall return for the MF scheme suffers.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>Large corpus<\/i><\/b><\/p>\n<p>Larger participation brings along its own problems. When a scheme is successful, it attracts more people. So, new units are created and distributed, thus increasing the corpus under management.<\/p>\n<p>As the amount managed by a fund manager increases, it becomes difficult to find good investment opportunities for that fund.<\/p>\n<p>This is especially true for mid-cap and small-cap funds, where investment avenues are very limited, and any large-sized investment can swing a stock\u2019s price.<\/p>\n<p>Thus, if the growth in corpus is not managed well, the scheme\u2019s performance can deteriorate.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>What is a close ended mutual fund (MF)?<\/b><\/p>\n<p>The units of a close-ended mutual fund are very similar to individual shares.<\/p>\n<p>The units of a close ended scheme are issued only at the time of the New Fund Offer (NFO). These units are issued with a fixed tenure or duration, for example, 5 years. New units are not issued on an ongoing basis, and existing units are not eliminated before the term of the fund ends.<\/p>\n<p>At the time of an NFO, you can buy the units from the fund house, and at the time of the closure of the scheme (and at some other pre-defined intervals, like once every six months), you can redeem the units with the fund house.<\/p>\n<p>But if you want to buy or sell the units of a close ended scheme during the lifetime of the units, you have to do that on a stock exchange. The units of such schemes are <b><i>listed on the stock exchanges<\/i><\/b> just like ordinary shares, and can be bought and sold through a broker.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-8580636079496870\";\n\/\/ArticleLinkList\ngoogle_ad_slot = \"0928256543\";\ngoogle_ad_width = 468;\ngoogle_ad_height = 15;\n\/\/--><\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"http:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Advantages of a close ended mutual fund (MF)<\/b><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>No redemption pressure, better returns<\/i><\/b><\/p>\n<p>When you want to get out of your investment from close ended funds, you sell them on the exchange. The fund house has no role to play in it. The units change hands from one investor to another \u2013 there is no impact on the funds with the fund manager.<\/p>\n<p>Therefore, there is no redemption pressure on the fund manager, and thus, there is no need to constantly keep unnecessary cash. This means better utilization of funds, resulting in better returns.<\/p>\n<p>Also, since the fund manager knows that the funds would be with him for a fixed duration, he can <b><i>invest for the long term<\/i><\/b>, thus reaping the benefits of long term investment.<\/p>\n<p>(Long term investment in shares always pays off. Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article175.html\"><b><u>Equity Investment is Risk Free \u2013 Here&#8217;s the Proof<\/u><\/b><\/a>\u201d and \u201c<a href=\"http:\/\/raagvamdatt.com\/Article93.html\"><b><u>Stocks &#8211; The winning bet for the long term<\/u><\/b><\/a>\u201d to know more)<\/p>\n<p>This is very similar to the philosophy behind ELSS schemes, where a lock-in period results in long term investment, which in turn results in better returns.<\/p>\n<p>(Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article68.html\"><b><u>ELSS is not for someone else<\/u><\/b><\/a>\u201d to know more)<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>Manageable corpus<\/i><\/b><\/p>\n<p>Again, since the buying and selling of the units of a close ended scheme doesn\u2019t have any impact on the funds in the hand of the fund manager, the amount or corpus under his management remains constant.<\/p>\n<p>There is no ballooning of the corpus, and the scheme is able to stay devoted to its investment philosophy.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Disadvantages of a close ended mutual fund (MF)<\/b><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>Lack of broad participation<\/i><\/b><\/p>\n<p>Since the number of units of close ended schemes is constant, there is naturally a cap on the number of investors that can participate in such schemes.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>Lack of choice<\/i><\/b><\/p>\n<p>Since most of the MF schemes in the market are open ended, you would have very little choice if you want to invest in a close ended scheme.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>Issue Expenses<\/i><\/b><\/p>\n<p>(This used to be a disadvantage, but SEBI took corrective action in January 2008. Now, only an entry load can be charged).<\/p>\n<p>In case of close ended schemes, the fund house can charge upto 6% of the amount collected through the NFO as issuing expense. And this amount is charged in one go, at the very beginning of the investment.<\/p>\n<p>This means that when you buy a unit for Rs. 10 in an NFO, only Rs. 9.4 is actually invested on your behalf! This is a big disadvantage, and can result in significantly lower returns over the long term.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p>Other articles you might be interested in:<\/p>\n<ul>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article201.html\"><u>Insure your health, save your income tax<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article200.html\"><u>Income tax treatment of leave travel allowance \/ concession (LTA \/ LTC)<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article199.html\"><u>An introduction to Varishta Pension Bima Yojana from LIC<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article198.html\"><u>Banks in India cut lending and deposit rates further<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article197.html\"><u>Best Performing Mutual Funds (MFs) of 2008<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article196.html\"><u>Post Office MIS and Recurring Deposit Combo: Safe investment, great returns<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article195.html\"><u>A comparison between bank FD and FMP: FD versus FMP<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article194.html\"><u>Advantages and disadvantages of home loan in joint names<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article193.html\"><u>Post Office Time Deposit Account (Fixed \/ Term Deposit)<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article192.html\"><u>Fixed Deposit (FD) \u2013 A favourite for generations<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article191.html\"><u>Post Offices \u2013 Another source for Gold Coins<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article190.html\"><u>An introduction to Post Office (PO) Recurring Deposit (RD) Account<\/u><\/a><\/li>\n<\/ul>\n<p>\n","protected":false},"excerpt":{"rendered":"<p>Mutual funds (MFs) are of two types \u2013 close ended and open ended. But what is the difference between these? If we do a close-ended versus open-ended comparison, is one better than the other? Is there any advantage in opting for one over the other? This article explains what these are, and compares these two [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"_links":{"self":[{"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/posts\/202"}],"collection":[{"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/comments?post=202"}],"version-history":[{"count":0,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/posts\/202\/revisions"}],"wp:attachment":[{"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/media?parent=202"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/categories?post=202"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/tags?post=202"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}