Confused between open-ended and closed-ended mutual funds? Learn how they differ in entry rules, liquidity, maturity periods, and suitability, so you can choose the structure that aligns with your financial goals.
Imagine joining a gym that lets you walk in, work out, and leave entirely on your own schedule. You have no fixed timings and no restrictions. Now, picture a different setup. Assume you’ve joined a 12-week fitness retreat where you enroll at the start, commit for the full duration, and cannot step out until the program ends.
Just like these two fitness setups follow different entry rules and time commitments, a very similar distinction can be seen across the two types of mutual funds: open-ended and closed-ended mutual funds.
In this blog, you’ll understand what each fund is, what sets these two fund types apart, and most importantly, which structure may align better with your investment approach. Let’s start with open-ended mutual funds.
What Are Open-ended Mutual Funds?
Open-ended mutual funds are investment instruments that allow you to invest or redeem your funds at any time on business days. Meaning, you can buy and sell the fund’s units at the Net Asset Value (NAV) whenever you wish. This provides flexibility and transparency as the NAV itself is calculated daily based on the changing value of the fund’s underlying securities.
Additionally, there are generally no restrictions on the maximum size of assets these funds can manage; they can issue unlimited units. As a result, the fund’s Assets Under Management (AUM) fluctuate with investor inflows and outflows and market movements.
Note: While rare, fund houses may temporarily suspend inflows in certain categories like Small Cap funds if valuations become unsustainable.
These funds are designed to be perpetual, with no fixed maturity timeline. This makes them ideal for SIPs or parking funds for liquidity purposes, where you may want the flexibility to track or liquidate your investments whenever needed. They also offer key benefits such as transparency, liquidity, and rupee cost averaging.
Unlike open-ended funds that allow continuous buying and selling, closed-ended mutual funds work differently and come with their own set of rules.
What Are Closed-ended Mutual Funds?
Closed-end mutual funds work differently from open-ended ones. These schemes accept investments only during their New Fund Offer (NFO) period. Once the NFO closes, the fund stops issuing new units and does not redeem existing ones directly, meaning its unit capital remains fixed throughout its tenure.
After you invest, your money stays locked in the fund until the maturity period ends. These funds typically have a fixed duration of 3 to 7 years. However, SEBI mandates that fund houses must offer an exit route before maturity. In practice, this is almost always done by mandatorily listing the scheme on a recognized stock exchange. While regulations allow for periodic repurchases as an alternative, listing is the standard industry practice.
Now, let’s put both types of mutual funds side-by-side for a detailed comparison.
Key Differences Between Open-ended and Closed-ended Mutual Funds
| Parameter | Open-Ended Mutual Funds | Closed-Ended Mutual Funds |
| Nature of Subscription and Redemption | You can subscribe and redeem units at any time on business days after the NFO period | You can subscribe only during the NFO period at the time of scheme launch. No additional units are sold by the fund house after the NFO period |
| Liquidity | Highly liquid. You can redeem units at NAV anytime without waiting for maturity. Direct redemption is available from the fund house | Low liquidity. Units cannot be bought or sold directly with the fund house during the lock-in period. You must sell on the stock exchange if you wish to exit early, where liquidity is often low |
| Mode of Investment | Flexible investment options available including SIPs, lump sum, and Systematic Withdrawal Plan (SWP) | Limited to lump sum investment only during the NFO. SIPs are not available as the fund is only open during NFO |
| Size of Issue | There is no limit on the number of units issued. Fund size can continuously increase or decrease based on investor inflows and outflows | Fixed number of units issued during the NFO period. Fund corpus remains stable after the NFO closes |
| Exit Load | Most open-ended funds may charge an exit load (typically 0.25% to 3%) if redeemed within 1 year of investment | Generally, no exit load is charged if funds are held till maturity. However, selling on stock exchanges may involve brokerage fees and pricing risk(units often trade at a discount to NAV), due to bid-ask spreads |
Advantages and Risks of Open-ended Mutual Funds
Open-ended mutual funds have their own set of unique advantages as well as risks you should be aware of. Let’s look at both of them.
| Parameters | Advantages | Risks |
| Liquidity | You can buy or redeem units at any time, giving you complete flexibility over your investments. | Easy liquidity may tempt investors to exit prematurely during market dips. |
| Valuation | Since the NAV is calculated daily, you always know the current value of your holdings. | Daily NAV changes can create volatility, especially for short-term investors. |
| Investment Suitability | Their perpetual nature makes them ideal for long-term goals and recurring SIP investments. | Because the fund can keep growing in size, returns may dilute if the AUM becomes too large. |
Like open-ended mutual funds, closed-ended mutual funds have unique advantages and risks. Let’s take a look.
Advantages and Risks of Closed-ended Mutual Funds
While open-ended funds provide flexibility and face risks such as volatility, closed-ended mutual funds operate differently and bring their own benefits and limitations.
| Parameters | Advantages | Risks |
| Investing Style | Since there is a fixed lock-in period, you have to stay invested for the entire duration. | You cannot redeem units directly with the fund house before maturity, limiting flexibility. |
| Fund Size & Strategy | The unit capital is fixed in these funds. Hence, managers can execute long-term strategies more effectively without worrying about sudden redemption pressures. | Missing the NFO means you may not be able to participate unless the units trade on an exchange. |
| Pricing & Exit | If listed on an exchange, units may sometimes trade at a discount or premium to NAV, creating opportunities for investors. | If listed on an exchange, liquidity may be low and prices may trade significantly lower than the actual NAV (Discount to NAV). |
Open-ended vs Closed-ended Mutual Funds: Which is Better for Investors?
If you want daily liquidity, prefer monitoring your portfolio, and need the option to redeem funds anytime, open-ended mutual funds are a better fit. They work well for investors like you seeking flexibility, emergency access, and long-term SIP-led investing.
But if you have a defined investment horizon and prefer committing your money without frequent exits, closed-ended mutual funds can be suitable. Their fixed lock-in encourages discipline and allows the fund’s strategy to run its full course.
Ultimately, the choice between open-ended and closed-ended mutual funds depends on the kind of investor you are, which option matches your liquidity needs, risk appetite, and financial goals better than the other.
