Mutual funds majorly come in two forms; open end and closed end.
Open end and closed end are reference terms used by a mutual fund company that issues an unlimited or a limited set of shares in a particular fund. Let us dwell into more detailed information about them.
Open End Funds
Open-end funds: Open end as the name itself suggests, simply means that the fund issues as many (or as few) shares as per the demand of the investor. Open-end funds conceptually have no limit to the number of investors involved or the amount of money that they hold.
Closed End Funds
Closed-end funds: Closed-end funds are those where the mutual fund companies decide diligently, before they consider investment from any investors, it is limited to a certain number of shares to be issued to the investors. Post issuance of shares, it is closed for the open purchase. The easier method to purchase closed end shares (or more shares) is to purchase them from the different investor through a stock broking company or a broker for online trading in India. Brokers play important role in making closed end funds dealings. This role of a broker is somewhat similar to the expertise involved in the process of buying and selling stocks.
Funds in the Market
Open Ended Funds comprise the biggest chunk of the mutual fund market. Therefore, most investors consider investing in open ended funds.
Open-end funds are usually preferable to closed-end funds for the following reasons:
Most Managers Have More Experience in Open Ended Funds
Being major contributor to the market, open-end funds attract more investors over a period of time. Buying and selling becomes easy for the investor. Compared to Closed End funds, brokers and fund managers are more experienced in handling Open End funds. Investors earning handsomely over time even afford to appoint dedicated fund managers and brokerage company for such funds. However, one aspect is important to consider here, Open-end funds being popular may be a safer choice than Closed-end funds, but the Closed-end funds comparatively produce a higher return, combining both dividend payments and principal appreciation.
Low Spends in Open-end Funds
Because they can have large pool of investors and huge corpus of money to manage, even performing open-end funds charge lower annual operating spends. Closed-end funds have limited scope in terms of spending in operational management so usually are costlier to operate. One should consider this fact that operating expenses are deducted out of shareholder ROI before the fund pays to its investors as per their calculated returns; therefore, relatively high yearly spends reduce the returns for closed-end funds. In such cases, stock brokers are better managers to give recommendations.
Brokerage Fees
Brokers who receive a commission for their services handle the initial sale of a closed-end fund. They have immense experience in handling such limited set of funds. Brokers’ generally charge commissions anywhere from 1% for debt fund and 2% for equity fund.
The brokerage fees depend on the stocks and services offered by the stock broking company. You can know about different brokerage fees by using free brokerage calculator to give you an idea of commission you have to incur for investment in Indian stocks.
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