Difference between open ended and closed ended mutual funds

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Mutual funds Investing can be a tricky business, especially for the first time investors. There are a thousand questions which come to one’s mind.

Where to invest? How much to invest? How much risk is too much risk? What are the types of mutual funds available in the market? And many more such questions haunts our mind every time we plan to invest.

So, to start with, this is what I would like to talk about in this article – open-ended vs closed-ended mutual funds. The awareness about this will help you choose right funds at right time during your investment journey.

What are open-ended mutual funds?

Open-ended funds are what you know as mutual funds. Let us understand this with an example of shares. For this, there is no limit on how many shares an investor can buy in the share market. Further, there isn’t any limit on the issuance of such shares. When an investor buys shares in the market, new shares are created.

Following the same logic, when an investor chooses to sell his/her shares, those shares are taken out of the circulation. If some investors choose to sell a lot of shares at the same time, the fund may have to go ahead with selling their investments to pay the investors.

Open-end funds are not like your regular stocks. It is not possible to watch your open-end funds on a regular basis because they are not traded on the open market. Their value is calculated at the end of every trading day by calculating the net asset value (NAV) of the entire fund.

What are closed-ended mutual funds?

At first glance, closed-ended funds may look same as open-ended funds, but they are not. At closer encounter, we would understand that the differences are huge.

Closed-ended funds behave more like exchange-traded funds and not like mutual funds. These funds are introduced using an IPO to raise money and traded in the open market same as stocks and exchange-traded funds (ETFs).

Such funds are issued in a fixed number of shares and value is calculated based on the demand and supply method. They also follow the NAV route for calculating the real value.

What Should one Invest in?

There is no concrete answer to this question. Due to financial behavior and investment mechanism, open-ended funds are considered less risky than the closed-ended funds. But closed-ended funds are known to produce better returns in the form of dividend payments and capital appreciation if invested properly after examining the market and health of the funds.

Having said this, we advise all investors to compare and study the funds they are investing in. No two funds behave in the same way and that’s the beauty of the financial market. We, at Money Dial, provide mutual fund advisor and distributor, who takes extra measures to educate investors like you about all the possible risks involved with their investments. And Mutualfundwala is one such name. This leads to better and well-informed investment producing better returns.

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