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Close Ended Versus Open Ended Mutual Funds: Identify The Pros And Cons Before Investing

Mutual funds are one of the most popular types of investments, and are preferred by millions of people around the world owing to the diversification they offer at a reasonable price.

Mutual funds can be set apart from other types of investments on the basis of their structure: close-ended or open-ended schemes. The major differentiating factor between close-ended and open-ended funds is the ease of purchase and sale of fund units and the function of flexibility. Before investing in mutual funds, evaluate the pros and cons of both schemes, and we are here to help you identify what is best for you.

Pros of Open-ended Mutual Funds: Records Can be Tracked

Close-ended schemes do not allow fund managers to review the fund performance across different market cycles due to the absence of a track record. However, open-ended schemes provide a record of historical performances for evaluation, enabling investors to take a well-informed decision.

Cons of Open-ended Mutual Funds: Exposed to Market Risk

Despite maintaining a highly diversified portfolio, the fund managers are exposed to market risk. The fund’s Net Asset Value (NAV) keeps fluctuating as per the underlying benchmark’s movement.

Pros of Open-ended Mutual Funds: Liquid Investment

Open-ended schemes have high liquidity, enabling investors to redeem their units whenever they like. Unlike other types of long-term investment schemes, open-ended funds provide flexibility of redemption to the investors at the current NAV.

Cons of Open-ended Mutual Funds: Exit Loads

Open-ended funds impose exit loads. These fees are applied when investors withdraw money before a predetermined period.

Pros of Close-ended Mutual Funds: Offers a Systematic Approach

The close-ended schemes support disciplined investment because the fund units are sustained until they mature. It contributes to boosting the long-term capital growth of the investor.

Cons of Close-ended Mutual Funds: Poor Performance

Closed-ended funds’ performance has failed to match up with open-ended schemes over various time horizons. The closed-ended funds’ lock-in period offers flexibility to the investors to allocate funds without worrying about outflows, but it does not help in generating better returns.

Pros of Close-ended Mutual Funds: Availability of Real-time Prices

Closed-ended funds essentially trade on equity shares. It offers the investors an opportunity to buy or sell fund units on the basis of real-time or market prices – above or below the NAV of the fund.

Cons of Close-ended Mutual Funds: Unavailability of Prior Records

Closed-ended funds lack performance history. Investors do not possess any information about historical performances at the time of the New Fund Offer debut because these plans are closed after reaching their maturity period.

Carefully evaluate the schemes, and aim for a diversified financial portfolio based on your risk appetite and suitability. Good Luck!