Difference between Open-ended and Closed-ended Mutual Fund with Example

by Nikesh | Last Updated On October 13, 2022

Understand Difference between Open-ended and Closed-ended Mutual Fund with Example. Which is Better?

Here we will understand the Difference between Open-ended and Closed-ended Mutual Fund with Example and also learn which one is better for investment.

Table of Contents

Introduction to Mutual Funds

A mutual fund is an investment in a portfolio of stocks, bonds, and other financial securities, looked after by a professional and experienced fund manager.

Mutual funds are one of the most popular investment option, especially for people who do not want to invest directly in stock market. It offers the benefit of diversification with minimum risk.

Such funds can be of 2 types – Open Ended or Closed Ended. The difference between the two types of funds lies in their investment structure and Lock in period.

What is Open-ended Mutual Fund?

Open ended funds are those that are always open to investment or redemption. This means that these funds can be bought or sold at any point of time. These funds do not have any lock-in period or any maturity period.

Open ended funds are the most common type of investment in mutual funds.

Example: Normal mutual funds, hedge funds and exchange-traded funds (ETFs).

What is Closed-ended Mutual Fund?

Closed ended mutual funds are those that can ONLY be bought during initial opening (NFO). These funds cannot be bought once the NFO Period is Over. Moreover, such funds have a lock-in period and cannot be redeemed or sold before that. It is similar to maturity of a Fixed Deposit in a Bank.

Closed-ended funds are not that common.

Example: Municipal Bond Funds