Undecided About Which Type Of Mutual Fund To Invest In. Check This Primer

A mutual fund is a financial vehicle that pools together money from various sources and invests it into different types of securities like stocks and bonds. When investors put their money in mutual funds, they partially own the fund and thus become eligible to get a share of the revenue generated by it. There are two types of mutual funds — open-ended and close-ended. The two differ in terms of their investment structure, the flexibility of investment, and the time within which they can be bought or sold.

Open-Ended Mutual Funds

One of the most common and popular investment tools, they always remain open to investment and recovery as they do not have a lock-in or fixed maturity period. Open-ended mutual funds offer higher liquidity and are not traded on stock exchanges.

Benefits And Disadvantages

In these funds, people can invest either a lump sum amount or periodically through Systematic Investment Plans (SIPs). There is no limitation on the number of purchases made within a fund. Before investing, an investor can check and verify a mutual fund's track record. One can invest as little as Rs 500 in these schemes.

Close-Ended Mutual Funds

As the name suggests, these funds lock in investments for a fixed time, preventing people from liquidating them until the specified time has passed. Also, you can apply for close-ended mutual funds only at launch. Once the New Fund Offer (NFO) period ends, investors cannot purchase or redeem units. These funds provide stability during the lock-in period.

Benefits And Disadvantages

The stability allows fund managers to strategise a growth trajectory for the mutual fund. However, this reduces options for investors as they can redeem their investments only after the lock-in period is over. Since an investor can make a purchase only during the NFO, he/she needs to make a lump-sum investment, and not through SIPs. This increases risk. The minimum investment amount is Rs 5,000.