So now you have sound knowledge of mutual funds, let’s try to understand some technical terms.
While investing in mutual funds, investors have the option to choose between Open Ended Mutual Funds and Close Ended Mutual Funds.
Its important to understand the meaning, pros and cons of each & every type of mutual funds.
Open Ended Mutual Funds?
Open ended mutual funds are a type of mutual funds which do not trade in open market. They can issue any number of units and can carry unlimited trades.
These funds purchase and sell units on a daily basis and hence an investor can enter or exit according to his benefits or will.
For eg equity funds, which invests majorly in stock market, uses the closing prices of the stock for the day to determine market value.
Open ended mutual funds have no fixed maturity period. They can be freely bought or sold at the existing NAV.
Pros of Open Ended Mutual Funds:-
- High Liquidity :- Open Ended schemes are highly liquid, as investor can enter or exit at his own will.
- Better Fund Management:- Fund manager is always on his feet due to daily fluctuations in NAV.
- Past Records available:- In Open ended schemes, you can always refer to past record for decision-making purposes, which is not available in close ended mutual funds.
- Possible to start small:- In Open ended scheme, you can enter at small amounts, since lump sum investment is not mandatory. You can start an SIP for open-ended fund and this will help you to diversify your risk.
Cons of Open Ended Mutual Funds:-
- High Market Risk:- There is always an element of market risk due to investors early entry and exit. The NAV keeps on fluctuating basis movement in portfolio.
- Fund Manager at Free Will:- Though fund manager stays on his feet to maintain investors invested, but he has a free hand in selecting the securities to invest. Investors have no say in that.S
Still open-ended mutual funds are preferred by investors to earn good return due to above mentioned pros.