The portfolio of securities generally consists of stocks, bonds, money market instruments or a combination of these.
Mutual fund schemes are generally of two types:
1. Open Ended schemes.
2. Close Ended schemes.
1. Open Ended schemes
Open Ended schemes are ‘open’ for subscription at any point in time throughout the year. In case of open ended funds, both subscriptions into and redemptions from the fund are effected by the fund house at the current NAV (Net Asset Value).
The number of units outstanding changes as a result of these subscriptions to and redemptions from the fund.
Also, because of the fact that redemptions are effected by the fund house on demand, units in an open ended scheme are not listed in a stock exchange.
2. Close Ended schemes
Close Ended schemes are characterised by a fixed number of ‘units’ and these units are open for subscription only for a specified period of time during the inception of the fund. Similar to common stock, ‘Units’ of a close ended fund are listed and traded on a stock exchange.
These units may trade on a stock exchange at a premium or discount to the current NAV – based on the investor’s expectations of the future performance of the fund.
Since, the units are listed and traded on a stock exchange, the investors have the necessary liquidity to enter into or exit a particular scheme. Through a stock exchange, an exiting unitholder can sell his stake to someone willing to buy them.
Often, close ended mutual fund schemes have a fixed tenure – at the end of which they are redeemed by the fund house (in a manner similar to a buy back of shares).