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Open-ended, Close-ended and Interval schemes

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Open-ended schemes

An Open-ended mutual fund scheme is one in which Purchase / Switch / Redemption of units is possible on all transaction days.

In this scheme, investors can purchase units from the asset management company directly (rather than from existing investors).

So, the assets in this scheme will keep changing (going up or down) on every transaction day.

This type of schemes are preferred because they allow investors to invest or redeem as and when they want.

i.e These provide flexibility.

Close-ended schemes

However, in Close-ended mutual fund schemes, investors will be able to purchase in New Fund Offer period only.

They will be able to redeem the investment only on the date specified by the scheme.

So, normal transactions like additional purchase, switch or redemption are not possible during the normal course of the close-ended scheme.

In most cases, the close ended scheme will wind off on the target date by redeeming and distributing all the money back to the investors.

Interval schemes

There are another type of schemes called Interval Schemes.

In these schemes, investors can be able to transact only on specified days in which the scheme will be made open.

They cannot transact on other normal transaction days.

So, this scheme is like open for short duration, close for long duration type.

In general, avoid Close-ended funds. Unlike in an open-ended fund, the fund manager will not get a constant flow of money in the form of SIP and hence if the fund is not managed properly or if the fund has no idle funds to invest in case of an opportunity, the scheme will not perform up to its expectations.

Close-ended funds do not offer smooth exit options and you need to pay an exit load if you do not want to stay invested for the entire duration of the scheme.

Also since the close-ended funds will be open for few days, it might not get the corpus that a normal open-ended would get. This means that the expense ratio will be generall be high.

Close-ended vs Lock-in

Lock-in is a term we use to say denote that the investor cannot transact in the scheme till a specific date.

In case of a close-ended scheme, no investor is allowed to transact in the scheme.

Purchase of units of close-ended can be done only during the NFO period.

So, the terms Close-ended and Lock-in are actually different and used for different contexts.

For Example,

ELSS schemes such as Reliance Tax Saver will have a lock-in of 3-years from the date of investment.

A scheme such as Birla Sun Life Fixed Term Plan - Series OI (1120 days) is a close-ended scheme. After the NFO period, no investor can transact in it till the completion of the 1120 days after which all maturity proceeds are distributed back to investors and the scheme is winded off or is extended for a further 1120 days period.

Conclusion

In most cases, open ended scheme are suitable for a wide range of situations and hence can be preferred over the other types.

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