A Guide to Open Ended Funds

A fund that is not restricted to the number of shares issued especially during the conditions when the demand is high or low is known as an Open Ended Fund. Also, it is quite flexible since an investor is free to sell it back; thus, a majority of funds are known to be open-ended and are extremely convenient in terms of being an investment vehicle. If the investment manager realizes that the total assets have become too large to manage and execute, he/she will open the investment for newer investors rather than continuing with the existing ones.

In the meanwhile, a close-ended fund is one of the mutual funds in India that is fixed and only sells a particular number of units and the existing investors cannot exit the term until the scheme ends. The price is also affected by the demand and supply of fund units. Close-ended funds offer to repurchase the units which results in an avenue for more liquidity.

Although close-ended funds are free from worries related to the fund size and regular redemption, open ended funds are still better to deal with and have performed better than their counterpart. The average return of a close-ended fund is about 7.38, 6.28 and 2.83 percent whereas open-ended funds have generated about 6.54, 8.86 and 3.36 percent of returns (same time period, i.e., a year).

The most preferred fund: Open-ended

A few examples would help you identify the kind of fund you would invest in. On the 22^nd of March, HSBC Unique Opportunities Fund, a close-ended fund converted into an open-ended fund due to the fact that it was unable to return the principal amount against the greater returns provided by an open-ended fund.

Performance issues

Open-ended funds have always outperformed its counterpart and peers especially during the market fall in the year 2008 all the way up to 2009.

NFO

The main purpose of launching close-ended fund schemes were to maximize investment and receive gains in a short duration after which one could make a hasty exit as soon as the scheme reopens for subscription. This was due to the fact that long term investors had to pay heavy duty; therefore, open ended funds were a way to eradicate the high costs.

Premature withdrawals

One of the sole reasons for the suffering and near demise of close-ended funds was the fact that there arose monthly redemption's and premature withdrawals were penalized which resulted in withdrawals from the investors. If there is a rush for redemption, then mutual funds managers need to sell liquid stocks and the market only constitute of illiquid stocks, which require some time recover. Due to the premature redemption's, close-ended fund suffer because new money is not allowed to enter the fund.

Also, a lack of monitoring affects close-ended funds, turning open-ended funds into a more desirable option for investors.  Also, there is nothing unique to offer from a close-ended fund’s point of view, therefore it is advisable to choose an open-ended fund.