TYPES OF MUTUAL FUNDS

TYPES OF MUTUAL FUNDS

Mutual funds can be classified into three broad categories depending on their basic characteristics. The way in which the features of the scheme are considered will also impact their classification.

OPEN ENDED FUNDS

Open ended mutual funds have an infinite life which means that there is no ending date of the scheme. This scheme can continue to go on forever and due to this factor the scheme allows investors to come in and go out of the fund when they wish subject to some specific conditions for a few funds. For example a large number of schemes in the Indian market are open ended schemes that invest in equities where they can continue to operate for years on end. The real benefit of these schemes is that an investor can put additional money into the scheme or take their money out when they feel like it rather than this being decided as a specific date by the fund or some other entity.

CLOSE ENDED SCHEMES

Close ended mutual fund schemes are those schemes that will come to an end after a specific period of time. In the strict sense when the time period comes to an end the assets of the scheme are sold off and these are distributed to the unit holders after deducting the necessary expenses for the entire process. Due to this factor close ended schemes will allow entry to an investor only at the time of the initial offering and there would be no entry for additional investors after this. Many schemes also have a restriction on the time of the exit from the scheme.

This does not mean that new investors cannot come into the fund. As a measure of liquidity often equity close ended funds are listed on the stock exchange whereby investors can buy the units of the scheme from another investor. However the total units issued by the scheme remains the same as the fund will not issue any additional units. This route has mostly witnessed the price of the units on the exchange quoting at a discount to the net asset value of the scheme. In such a scheme the fund manager knows precisely what is the amount that is available to them to invest and they can take long term investment decisions accordingly.
Many close ended schemes are of this nature for a particular duration but they turn open ended after the specified time period like 3 or 5 years whereby the nature of the scheme changes. Further in some kind of investments there is a necessity that the funds remain invested for a certain period of time and hence in that sense close ended schemes become necessary