Mutual funds can be classified in many ways but it is important to know their classification of mutual funds in terms of open and close ended mutual funds. Let’s look at both of them –
Open ended mutual funds are those which remain open for issue and redemption of its units for unlimited period of time, which implies that investors can buy and sell mutual funds units at any time without any restriction. However due to this type of mutual fund have to maintain high level of cash or marketable securities in their portfolio because there can be redemption pressure from investors at any point and therefore they need to have high amount of cash so as to meet that redemption.
A close ended mutual fund is one which can issue units only in the beginning of the launch of fund and investors cannot redeem those units before a fixed duration. Since investors cannot redeem the units these types of funds have higher flexibility in terms of their portfolio strategy because they know that when investors will redeem the units and therefore they can plan the investments accordingly. However due to limit on the redemption, closed ended mutual funds tend to quote at discount to open ended mutual funds, since investors prefer those investments which they can liquidate quickly.