Mutual funds are one of the modern investment tools which not only hold the potential to provide investors with decent returns but can also be considered for fulfilling one’s long term investment goals. Every individual has a goal, for example, someone wishes to save enough money to build a commendable retirement corpus for their sunset years, someone already has their retirement planned and hence want to save money for their children’s education and future, while others have goals like getting an adventure bike or a car.
No matter what your goal is, if you invest smartly in mutual funds and remain invested for the long run, your investments have the potential to grow and help you get closer to your ultimate financial goal.
But what are mutual funds exactly?
A mutual fund is a financial tool where AMCs or fund houses collect money from investors sharing a common investment objective and invest it on behalf of these investors. This pool of funds raised by the investors is then invested across the Indian economy in various sectors and asset classes like equity, debt, government securities, corporate bonds, etc. This way, mutual funds do not only offer diversification but also reduce the risk from an investor’s portfolio.
Mutual funds are primarily categorized into – open ended funds and close ended funds. If you wish to read more about these funds and mutual funds in general, read further:
Open ended funds and close ended funds
Open ended funds are those mutual funds which investors can buy without any limitations on the units. These funds do not have a fixed maturity period and are continually being bought and sold. It is because if these open ended fund units are available for investment round the clock. The units allotted by the fund to the investor are according to the current net asset value or NAV of that fund.
Close ended funds, on the other hand, sell a fixed number of units. The price of these units is fixed, unlike open ended funds whose units price is subject to the fund’s existing NAV. Investors cannot buy / sell close ended fund units, until the fund gets publicly listed. These funds can mostly purchased during an NFO and are subject to the allotment as made available by the fund house.
Difference between open ended and close ended funds
|Parameters||Open ended funds||Close ended funds|
|Definition as per SEBI||An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis.||A close-ended fund or scheme is open for subscription only during a specified period at the time of launch of the scheme.|
|Liquidity||The biggest advantage of an open ended mutual fund is that it offers great amount of liquidity to its investors.||Close ended fund holders do not have any liquidity till the NFO period is over.|
|Listing||These are publicly listed funds.||These are unlisted funds.|
|NAV||Depending on the market performance of the fund.||Due to liquidity pressure, NAV of close ended funds is offered at a discount rate.|
|Maturity||Does not have a fixed maturity period.||Comes with a fixed maturity period.|
Be it open ended or close ended, every financial consultant advises investors to remain invested in mutual funds for the long run. That’s because mutual funds are subject to market risk, and returns from these investments are never guaranteed. However, historically mutual funds have churned better returns and even have the potential to beat market inflation if remained invested in keeping a long term investment objective.
So it is better that you invest according to your risk appetite and, if possible, keep your investment horizon for at least five years in mutual funds, that too if you really want to see how potentially your money can grow. Remember that financial planning is a long journey, and the key to tasting success at the end of this journey is to invest regularly and give your investments some time to flourish. It is only then that you stand a chance of getting closer to your ultimate financial goal.