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Open-Ended vs Close-Ended vs Interval Funds

Introduction

The structural classification of mutual funds defines liquidity—how easily you can enter or exit the scheme. While the investment objective tells you where the money goes, the structure tells you when you can get your money back. In India, Open-Ended funds are the most popular, but Close-Ended and Interval funds serve specific strategic purposes.

1. Open-Ended Funds

Concept: An Open-Ended fund is available for subscription and repurchase on a continuous basis. It does not have a fixed maturity period.

Key Characteristics:

  • Liquidity: High. Investors can buy or sell units directly from the AMC on any business day.
  • Price: Transactions happen at the daily Net Asset Value (NAV).
  • Corpus: Variable. The fund size grows when new investors join/invest and shrinks when investors redeem.
  • Listing: Not required to be listed on stock exchanges (though some are for convenience).

Pros:

  • High liquidity (money available T+1 or T+2 days).
  • SIP (Systematic Investment Plan) is possible.
  • Track record usually visible over long periods.

Cons:

  • Redemption Pressure: Sudden large redemptions can force the fund manager to sell good stocks at bad prices, potentially hurting remaining investors.

2. Close-Ended Funds

Concept: A Close-Ended fund has a stipulated maturity period (e.g., 3 years, 5 years, or 10 years). The fund is open for subscription only during the specified period at the time of launch (New Fund Offer or NFO).

Key Characteristics:

  • Entry/Exit: Investors can invest only during the NFO. They cannot redeem units directly with the AMC until the maturity date.
  • Liquidity Mechanism: To provide an exit route, SEBI mandates that these units must be listed on recognized stock exchanges (NSE/BSE). Investors buy/sell units from other investors on the exchange.
  • Price: Market price on the exchange (which may be at a discount or premium to the actual NAV).
  • Corpus: Fixed. Since no new units are created or redeemed, the number of outstanding units remains constant.

Pros:

  • Stable Capital: Fund managers have a fixed amount of money for a fixed time, allowing them to invest in illiquid or long-term assets without worrying about redemption pressure.
  • Market Opportunities: Sometimes trade at a significant discount to NAV, offering bargain opportunities.

Cons:

  • Low Liquidity: Volumes on stock exchanges for close-ended funds are often very low; finding a buyer can be difficult.
  • No SIP: Cannot invest systematically passed the NFO.

3. Interval Funds

Concept: Interval funds combine features of both open-ended and close-ended schemes.

Key Characteristics:

  • Transaction Windows: The fund is open for specific intervals (e.g., first 2 days of every month/quarter) for purchase and redemption at NAV.
  • Rest of the Time: The fund remains closed (like a close-ended fund).
  • Listing: Units may be listed on stock exchanges for trading during the non-transaction period.
  • Suitability: Typically used for institutional debt funds where managers need stability but can offer periodic liquidity.

Detailed Comparison Table

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Why Close-Ended Funds Often Trade at Discount?

It is observed that close-ended funds often trade on the stock exchange at a price lower than their NAV (Discount).

Reasons:

  1. Illiquidity: Lack of buyers forces sellers to lower prices.
  2. Market Sentiment: If the market outlook is bearish, buyers demand a discount.
  3. No Direct Exit: Since you can't go to the AMC for NAV, you are at the mercy of the market price.

Example:

  • NAV of Fund X (Close-Ended) = ₹15.00
  • Market Price on NSE = ₹13.50
  • Discount = ₹1.50 (10%)
  • An astute investor buying at ₹13.50 gets assets worth ₹15.00!

Exam Notes: Writing the Answer

Question: "Distinguish between Open-Ended and Close-Ended Mutual Funds." (10 Marks)

Model Answer:

The primary difference lies in the liquidity flexibility offered to the investor.

Open-Ended Funds:

  • Flexibility: Investors can enter and exit anytime.
  • Transaction: Buying and selling is done directly with the Mutual Fund (AMC) at the NAV-linked price.
  • Capital: The unit capital is variable; it changes daily with new inflows/outflows.
  • Role: Best for retail investors, allows SIPs.

Close-Ended Funds:

  • Rigidity: Investors can enter only during the NFO period.
  • Transaction: No direct redemption with AMC. Exit is possible only by selling units on the stock exchange (Secondary Market).
  • Capital: The unit capital is fixed (constant).
  • Role: Good for stable portfolio management as managers face no redemption pressure.

Interval Funds:

  • Operate as close-ended most of the time but open up for redemption during specific pre-defined intervals (transaction windows).

Summary

  • Open-Ended: Buy/Sell anytime @ NAV. Variable corpus. Most liquid.
  • Close-Ended: Buy at NFO, Sell on Exchange. Fixed corpus. Fixed maturity.
  • Interval: Hybrid. Open during specific windows.
  • Listing: Optional for Open-Ended; Mandatory for Close-Ended.
  • Pricing: Open-Ended = NAV; Close-Ended = Market Price (often at discount to NAV).

Quiz Time! 🎯

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