You can invest in two main types of mutual funds: open-ended and closed-ended funds. These funds differ in how you can buy and sell units, and when you can invest.
Open-ended funds
Open-ended funds allow you to buy and sell units at any time after the New Fund Offer (NFO) period ends. When you purchase units, the fund creates new ones, and when you sell units, the fund removes them from circulation.
You can buy and sell units at the Net Asset Value (NAV), which fund houses calculate at the end of each trading day based on the current value of the fund's underlying securities. Open-ended funds do not restrict the number of units they can issue, giving you flexibility to invest or redeem your investment whenever you choose.
Closed-ended funds
Closed-ended funds have a fixed unit capital and sell only a specific number of units during their NFO period. Once the NFO period closes, you cannot buy units directly from the fund house.
These funds raise a predetermined amount of capital only once through the NFO by issuing a fixed number of units. After the NFO period ends, you can only buy and sell units on the stock exchange where they are listed, similar to how you trade stocks.
The market price of closed-ended fund units fluctuates based on supply and demand, as well as changes in the value of the fund's underlying securities. This means the market price may differ from the NAV of the fund.
Key differences
- Investment timing: You can invest in open-ended funds at any time, while you can only invest in closed-ended funds during the NFO period.
- Unit creation: Open-ended funds continuously create and redeem units based on investor demand, whilst closed-ended funds issue a fixed number of units only during the NFO.
- Pricing: Open-ended funds price units at NAV, while closed-ended funds trade at market prices that may be above or below the NAV.
- Liquidity: Open-ended funds offer immediate liquidity through the fund house, whereas closed-ended funds require you to sell units on the stock exchange to other investors.