Understanding Mutual Funds: Open-ended and Closed-ended

Indian mutual fund industry’s average assets under management (AAUM) stood at Rs 39.88 lakh-crore (Rs 39.88 trillion) in September 2022, as per the Association of Mutual Funds in India (AMFI).

Mutual funds are generally categorised as open-ended and closed-ended mutual funds as per their structure, as well as how investors purchase and trade them. 

So, here’s the lowdown on what classifies as open-ended and closed-ended mutual funds:

Simply put, open-ended funds are ‘open’ for investment at all times.

Investors in such mutual funds are offered shares without limits—buying and selling options are available at any time. 

Generally, open-ended funds offer convenience to investors since they satisfy their immediate financial needs all at once. An investor can buy shares even after the initial offering period. The price is determined by the fund, which is known as net asset value (NAV).

The open-ended funds are professionally managed while following an investment strategy, which means that a team of professionals takes care of the investment strategy. 

At the other end of the spectrum are closed-ended mutual funds that are known to raise a fixed amount of capital from investors with an initial public offering (IPO) and list their shares on a stock exchange. A fund manager oversees closed-ended mutual funds. 

An IPO is initiated to raise capital for the mutual fund. Shares are issued to investors who provide capital for the mutual fund. After this, these shares are listed on the secondary market for investors to trade based on supply and demand.

There is no provision to issue additional shares or buy back shares in the case of a closed-end mutual fund.

Investors must take into account their goals based on their investment horizon and risk profile before investing in mutual funds.