Types of mutual fund...

Types of Funds

Open-Ended Funds, Close-Ended Funds and Interval Funds

Open-ended funds: are open for investors to enter or exit at any time, even after the NFO. When existing investors buy additional units or new investors buy units of the open ended scheme, it is called a sale transaction. It happens at a sale price, which is equal to the NAV. When investors choose to return any of their units to the scheme and get back their equivalent value, it is called a re-purchase transaction. This happens at a re purchase price that is linked to the NAV. Although some unit-holders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. The ongoing entry and exit of investors implies that the unit capital in an open-ended fund would keep changing on a regular basis. Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-NFO in a stock exchange. This is done through a listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO, investors who want to buy Units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell Units will have to find a buyer for those units in the stock exchange. Since post- NFO, sale and purchase of units happen to or from a counter-party in the stock exchange – and not to or from the mutual fund – the unit capital of the scheme remains stable. Interval funds combine features of both open-ended and closeended schemes. They are largely close-ended, but become openended at pre-specified intervals. For instance, an interval scheme might become open-ended between January 1 to 15, and July 1 to 15, each year. The benefit for investors is that, unlike in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or sell units of the interval fund.