The following message is currently circulating in numerous WhatsApp groups, particularly those focused on investments.
“Today is a historic day for the mutual fund industry !!. Exactly 100 years ago, on 21st March 1924, the first open-ended-mutual fund was started by Edward Leffler. He called it Massachusetts Investors Trust (MIT). From a humble start today the industry manages more than 70 trillion dollars globally and more than 50 lakh crores in India !”
When I came across this message, it brought back memories of my earliest experience with mutual funds. While UTI was the frontrunner in mutual funds in India, I can't recall purchasing any UTI units. With our family's longstanding association with Indian Bank spanning three generations, the mutual fund offers from the bank (conspicuously advertised in all branches) immediately captured our attention. (Those were the days when one had to physically visit the bank branch for almost everything.) We started to invest in Mutual Funds by applying for units of Ind Sagar, Ind Moti, and Ind Tax Shield.
Morgan Stanley Mutual Fund made its debut in the Indian market with the launch of its first fund, the Morgan Stanley Growth Fund, in 1994. This marked the beginning of foreign funds entering the Indian investment landscape. The Morgan Stanley Growth Fund was launched as a fifteen-year close-ended fund.
As awareness about mutual funds as an investment avenue grew, investing in them became increasingly popular as a means to accumulate wealth over time. Mutual funds offer diversification, professional management, and access to a wide range of investment options, which may be challenging for individual investors to attain independently. Over time, investors became familiar with terms such as open-ended funds, close-ended funds, NAV (Net Asset Value), and others.
In this article, let's take a brief look at close-ended and open-ended mutual fund schemes.
Close-Ended Mutual Funds
A closed-ended fund is a type of investment fund where a fixed number of units are issued when it starts. After this, investors can't buy or sell units until the fund matures. These funds are introduced through an NFO (New Fund Offer) and are then traded in the market like stocks, with a set end date. Even though the Net Asset Value (NAV) sets the real price of the fund, its market price can be higher or lower depending on how much demand there is. Simply put, a closed-ended fund 'closes' after the launch until it matures. This gives the fund manager more freedom to reach the fund's goals.
Since investors can't cash out their units early with a closed-ended fund, fund managers have a fixed amount of money to work with. They don't have to worry about keeping enough cash available because there are no early withdrawals. This lets the fund manager create a strategy to reach the fund's goals without being pressured.
One good thing about investing in a closed-ended mutual fund is that they might offer better chances for the value of your investment to increase compared to open-ended funds. This is because closed-ended funds don't have to deal with investors pulling out money like open-ended funds do. In other words, the fund manager doesn't have to sell investments to get cash for withdrawals, which can bring down prices.
Open-Ended Mutual Funds
An open-ended mutual fund is a type of mutual fund that can issue an unlimited number of units. Unlike close-ended funds, open-ended funds do not trade on an exchange. Instead, investors can buy or sell units directly from the fund at the current NAV. When an investor wants to buy units in an open-ended fund, the fund issues new units. When an investor wants to sell units, the fund redeems them.
Open-ended funds are the more popular of the two types of mutual funds, and they make up the vast majority of mutual funds available to investors. They offer several advantages over close-ended funds, including greater liquidity, lower costs, and greater flexibility.
One advantage of open-ended funds is that they offer greater liquidity than close-ended funds. Investors can buy or sell units in an open-ended fund at any time, and the price is based on the current NAV, which is determined at the end of each trading day. This makes it easier for investors to enter and exit the fund, and it reduces the risk of paying a premium or discount to the NAV.
Another advantage of open-ended funds is that they often have lower costs than close-ended funds. This is because open-ended funds do not have the same overhead costs as close-ended funds, which must maintain a trading presence on an exchange.
Open-ended funds also offer greater flexibility than close-ended funds. Fund managers can adjust the size of the fund and the composition of the portfolio in response to changes in the market. This allows the fund manager to take advantage of new investment opportunities as they arise, and it can help to reduce risk by spreading investments across a diverse range of securities.
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