Investing in mutual funds is not just about earning attractive returns but also about achieving your financial goals. As an investor, choosing the right type of mutual fund that aligns with your investment objectives and risk appetite is important. While some investors may prefer the high-risk, high-growth potential of equity mutual funds, others may opt for a more conservative approach with fixed-income investments. That’s where debt funds come into play.
However, mutual funds are further categorised into open-ended and close-ended, representing the type of securities they invest in, returns they seek, their investment objectives, structure, risk profile, etc. So, before you decide to invest in debt funds, let’s first understand these two broad categories of mutual funds.
- Open-ended debt funds
Open-ended debt mutual funds allow investors to enter and exit freely without any predetermined time limit. These funds buy and sell units regularly, meaning that investors can enter or exit at any given moment when it is convenient for them.
Prices of units bought or sold in an open-ended debt fund depend on net asset value (NAV), which can change daily as per market and interest rate movements. It should be noted, however, that if an investor wishes to exit one of these schemes prematurely, they may incur an exit load fee (if applicable).
What type of investors can benefit from open-ended debt funds?
An open-ended mutual fund scheme is suitable for investors who want regular income from their investment with low risk. These schemes are also ideal for investors who want short-term investments that offer liquidity, meaning they can enter or exit any time. Some examples of open-ended debt schemes include overnight funds, liquid mutual funds, short-term debt funds, dynamic bond funds, etc.
- Close ended debt funds
A closed-ended debt mutual fund scheme is where your investment is locked in for a specified period of time. The units are purchased at NAV during the initial issue period and can be redeemed after the maturity date upon expiration of the fund’s tenure.
For example, fixed maturity plans (FMPs) invest in debt securities with a specific date of maturity. The funds cannot be withdrawn before maturity, but you can still sell them on the stock exchange. Another closed-ended debt fund is capital protection-oriented funds (CaPrOF).
Benefits of close-ended funds
Due to their fixed maturity period, these funds provide stability in your investment portfolio, allowing you to plan your financial goals easily. Moreover, these schemes also offer freedom from significant flows, which means that the fund’s performance is not affected by investors’ actions.
Additionally, because there is no need for a continuous repurchase and subscription process, the costs associated with close-ended funds are generally lower than those for open-ended schemes, making them a more cost-effective investment option.
To wrap up
Both open ended and closed ended funds are effective financial instruments for investors looking to target specific savings objectives. Open-ended funds may offer more flexibility and liquidity by allowing investors to enter and exit their positions at any point in time. Close-ended funds have a fixed term and may offer stable returns due to being immune to large inflows or outflows.
It is also worth noting that while there are risks associated with both types of funds, they differ in nature. Open-ended debt funds can be more susceptible to volatility, while close-ended funds face more liquidity risks. Ultimately, the decision should be made based on the individual investor’s risk appetite, investment objectives, and financial goals.
