Open Ended Mutual Funds and Closed Ended Mutual Funds – Comparative Analysis

By REPAKA PAVAN ADITYA

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Updated on: May 30th, 2025

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6 min read

Imagine walking into a buffet where you can serve yourself anytime versus a pre-plated dinner where you must take what’s served and can’t return for seconds. That’s the difference between open-ended and closed-ended mutual funds. Both cater to different appetites, timings, and risk levels. However, knowing which fits your financial plate is key as an investor.

What Are Open-Ended Mutual Funds?

Open-ended mutual funds are investment schemes that allow investors to enter and exit anytime.  Open-ended mutual funds let investors buy or sell units at any time based on the fund’s current Net Asset Value (NAV). These funds don’t have a fixed maturity date, and the fund house continuously issues or redeems units, allowing the fund size to expand or contract as needed. This structure provides flexibility and easy access to your money.

They’re ideal for long-term goals and regular investing through SIPs. Since the NAV is updated daily, you can track your investment. With benefits like liquidity, transparency, and compounding, open-ended funds are popular for retail investors looking to build wealth steadily.

Key Features

  • Allows investment and redemption at any time.
  • No fixed maturity period – stay invested as long as you want.
  • Units are bought and sold based on daily NAV.
  • High liquidity makes it easy to access your money.
  • Suitable for SIPs and long-term financial goals.
  • Fund size adjusts with investor inflows and outflows.
  • Transparent portfolio disclosures and regular updates.
  • Ideal for investors seeking flexibility and control.

What Are Closed-Ended Mutual Funds?

Closed-ended mutual funds are investment schemes with a fixed maturity period, typically three to five years. These funds are open for subscription only during their New Fund Offer (NFO) period. Once the NFO closes, no fresh investments can be made, and the number of units remains fixed. After launch, the fund units are listed on a stock exchange, and investors can buy or sell them just like shares based on market prices, not NAV.

Since investors can't pull out their money directly before the fund matures, closed-ended mutual funds don’t offer the same liquidity as open-ended ones. But that’s not necessarily a bad thing. With a fixed pool of money to manage, fund managers get the breathing space to make long-term investment decisions without the pressure of people withdrawing funds every time the market dips. This setup works well for investors who are okay with locking in their money and prefer not to react emotionally to every market movement.

Key Features

  • Have a fixed maturity period, usually 3 to 5 years.
  • Open for investment only during the New Fund Offer (NFO).
  • No direct redemption allowed before maturity.
  • Units are traded on stock exchanges like shares.
  • Market price may differ from NAV due to demand and supply.
  • Fixed fund size allows fund managers to have stable capital.
  • Limited liquidity compared to open-ended funds.
  • Suitable for disciplined, long-term investors.

Open-Ended vs Closed-Ended Mutual Funds

Parameter

Open-Ended Mutual Funds – Limitations

Closed-Ended Mutual Funds – Limitations

Liquidity Management

High liquidity can pressure redemption, especially during market panic or corrections.

No direct redemption before maturity, investors must wait or sell on exchanges, which may lack liquidity.

NAV Impact

Frequent redemptions may force the fund manager to sell holdings at inopportune times, affecting NAV.

NAV is not directly accessible after NFO; units trade at a premium or discount on exchanges.

Price Realization

Investors always redeem at NAV, even if the market outlook suggests holding would benefit.

Selling units on stock exchanges may fetch less than NAV due to low demand or wider bid-ask spreads.

Emotional Bias

Easy exit routes may tempt investors to sell during downturns, erasing wealth.

Lock-in discourages panic selling and traps investors if they need urgent funds.

Fund Size Volatility

Continuous inflows and outflows can create volatility in AUM, impacting fund management strategy.

Fund size is fixed post-NFO, which limits flexibility in raising capital for new opportunities.

Access to Investment

Available for purchase any day, which can be good or bad depending on investor behaviour and timing.

Can only be bought during NFO or on exchanges. Missed NFO means missed opportunity.

Market Timing Risks

Trying to time entries/exits can defeat the purpose of long-term investing, especially in equity funds.

Post-NFO, entry/exit depends on market price, not NAV. Investors may unknowingly buy high or sell low.

Transparency & Pricing

Transparent NAV-based pricing, but may create the illusion of safety, encouraging short-term decisions.

NAV is disclosed, but trading happens at the market price, which can deviate significantly.

Fund Manager Constraints

Constant fund size changes force managers to maintain liquidity, which can dilute returns.

A stable corpus allows better planning but restricts response to unexpected opportunities or risks.

Exit Loads and Costs

It may have an exit load if redeemed within a short period (typically 1 year).

No exit load, but exchange sales may involve brokerage fees and pricing risks.

Suitability Mismatch

Not ideal for investors who lack discipline or long-term vision.

Not suitable for those who need flexibility, cash flow access, or emergency liquidity.

Volatility Exposure

NAV reflects real-time volatility; investors feel every up and down daily.

Listed market price may be more volatile than NAV, especially in low-volume trading conditions.

Distribution & Reach

Readily available through online platforms and distributors, overexposure can lead to herd behaviour.

Limited visibility post-NFO; new investors often miss out due to a lack of marketing or awareness.

Psychological Stress

Daily NAV updates may cause anxiety, especially during short-term dips.

Market discount pricing may stress investors who don’t understand NAV vs market price dynamics.

Pros and Cons of Open-Ended Mutual Funds

Pros:

  • High Liquidity: Based on daily NAV, you can enter and exit anytime, making it ideal for emergencies or changing goals.
  • SIP-Friendly: Perfect for building wealth over time through regular, disciplined investing.
  • Transparency: Daily NAV disclosures and frequent updates on holdings keep investors well-informed.
  • Flexibility: Adjust your investment amount or switch between funds with ease.
  • Compounding Benefits: Long-term SIPs in open-ended funds can harness the power of compounding effectively.

Cons:

  • Emotional Traps: An Easy exit means investors often panic during market dips and exit early.
  • Redemption Pressure: Heavy redemptions during market stress can force fund managers to liquidate assets at a loss.
  • Exit Loads: Some funds charge exit loads if withdrawn early, which can eat into returns.
  • AUM Volatility: Frequent inflows and outflows can distract fund managers from long-term strategies.

Pros and Cons of Closed-Ended Mutual Funds

Pros:

  • Disciplined Investing: Lock-in discourages panic selling and emotional exits.
  • Stable AUM: Since fund size remains fixed, fund managers can plan long-term without redemptions disrupting strategy.
  • Potential Undervaluation Opportunity: Units may trade below NAV, allowing savvy investors to buy at a discount.
  • No Exit Load: Since units are traded on exchanges, exit loads are typically not applicable.

Cons:

  • Limited Liquidity: You can’t redeem directly with the AMC before maturity; you can only redeem through stock exchanges.
  • Market Price Fluctuations: Units may trade at a discount or premium, depending on demand and supply.
  • Lower Awareness & Accessibility: Many retail investors miss NFOs and aren’t familiar with secondary market buying.
  • Not Ideal for SIPs: Unlike open-ended funds, these funds aren’t built for regular monthly investments

Which One Should You Choose?

Open-ended mutual funds suit you better if you value flexibility and want the option to invest or withdraw whenever needed. They’re ideal for slowly and steadily building wealth through SIPs. Whether your goal is long-term, like retirement, or short-term, like saving for a vacation, you’ll appreciate the freedom to move your money as life changes.

But if you’ve got a lump sum ready and know you won’t need that money anytime soon, closed-ended funds might be the smarter path. Since your investment stays locked in for a set period, you’re less likely to panic when the market gets shaky. That kind of structure can help, especially if you're tempted to pull out at the first sign of red. Sometimes, not having the option to react too quickly is exactly what keeps your long-term goals on track.

Conclusion

It comes down to how you handle money. Open-ended funds are a better fit if you like being hands-on and want the freedom to invest or exit anytime. But if you're okay locking in your money and don’t want the stress of watching the market, daily closed-ended ones make more sense. Pick what matches your mindset, not just the returns.

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Frequently Asked Questions

an I redeem open-ended mutual fund units anytime?

Yes, you can redeem open-ended funds anytime at the current NAV.

Are closed-ended funds suitable for SIPs?

No, closed-ended funds don’t support SIPs as they’re only open for investment during the NFO period.

Why do closed-ended fund units trade at a discount?

Because they're listed on stock exchanges, their market price depends on demand and supply, not NAV.

About the Author
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REPAKA PAVAN ADITYA

Stocks and Mutual Funds Research Analyst
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I manifest my zeal in financial quantitative & quantitative research and have been instrumental in creating a robust process for the evaluation and monitoring of mutual funds. I’m responsible for Equity and Mutual Funds Research while creating instrumental mathematical models for portfolio construction after evaluating funds, and I play an integral role in analyzing changes in mutual funds, micro, and macro-economic indicators, and equity market events and trends. My views on asset classes which are integral in creating an investment strategy for any profile. Read more

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