Open-ended and closed-ended mutual funds are distinguished by their structure and how they handle investments. Open-ended funds continuously issue and redeem shares, allowing investors to buy or sell at any time. Closed-ended funds, on the other hand, have a fixed number of shares that are traded on the stock exchange, similar to stocks.
Open-ended Funds
Structure
- Continuously issues new shares and redeems existing ones based on investor demand.
- Liquidity
- High liquidity, as investors can buy and sell shares directly from the fund at any time.
- Pricing
- Shares are priced at the Net Asset Value (NAV), which is the value of the fund's assets divided by the number of outstanding shares.
- Investment
- Can be invested in through Systematic Investment Plans (SIPs) or lump-sum investments.
- Example
- Many common mutual funds, like those focused on stocks or bonds, are open-ended.
Closed-ended Funds
- Structure
- Issues a fixed number of shares during an initial offering, and then the shares are traded on a stock exchange.
- Liquidity
- Lower liquidity compared to open-ended funds, as investors must trade shares on the secondary market, not directly with the fund.
- Pricing
- Shares are priced based on supply and demand on the stock exchange, which can be different from the NAV.
- Investment
- Typically require a lump-sum investment during the initial offering.
- Example
- Some bond funds or international investment funds may be closed-ended