Open Ended Close Ended Interval Schemes and ETFs
This sub‑topic covers the four major mutual fund structures used in India – Open‑ended, Close‑ended, Interval schemes and Exchange‑Traded Funds (ETFs). Understanding their operational mechanics, pricing, liquidity and regulatory nuances is essential for the NISM Series X‑A exam. The content links these schemes to SEBI guidelines and highlights typical exam questions.
Learning Objectives
- 1Define each scheme type and its key characteristics.
- 2Explain pricing, redemption and liquidity rules for open‑ended, close‑ended and interval funds.
- 3Describe how ETFs differ from traditional mutual funds and how they are traded.
- 4Identify common exam traps related to scheme classification and regulatory requirements.
Open‑Ended Schemes
Open‑ended schemes are the most common mutual fund structure in India. Investors can buy or redeem units at any business day at the prevailing Net Asset Value (NAV) calculated at the end of that day.
Because redemption is continuous, the fund manager must maintain sufficient liquid assets to meet redemptions, which influences the portfolio’s asset allocation and expense ratio. The minimum investment amount is set by the AMC, typically ranging from Rs. 1,000 to Rs. 5,000, making these schemes highly accessible.
For the NISM exam, remember that open‑ended funds are not listed on any exchange, and their NAV is disclosed daily on the AMFI website. Questions often test the difference between purchase price (NAV + entry load, if any) and redemption price (NAV – exit load, if any).
- Continuous purchase/redemption – daily NAV.
- Liquidity is high; investors can exit at any time.
Some candidates mistakenly think open‑ended funds have a 7‑day settlement period. In reality, the settlement is T+2 (two business days) after the transaction date, just like equities.
Close‑Ended Schemes
Close‑ended schemes raise a fixed amount of capital through an initial public offering (IPO) and then list their units on a stock exchange. After the issue closes, new investors can only buy units from existing holders on the secondary market.
The NAV of a close‑ended fund is calculated daily, but the market price may trade at a premium or discount to NAV depending on demand‑supply dynamics. The fund’s liquidity is therefore linked to exchange trading volumes rather than daily redemption.
Exam questions frequently ask about the impact of a premium/discount on an investor’s effective return, or the regulatory requirement that a close‑ended fund must disclose its NAV and market price side‑by‑side.
- Fixed capital raise – no fresh inflow after IPO.
- Units trade on exchange – price can diverge from NAV.
Do not confuse the listing of close‑ended fund units with the daily NAV publication. The fund must publish NAV daily, but the unit price shown on the exchange is the market price, not the NAV.
Interval Schemes
Interval schemes are a hybrid between open‑ended and close‑ended funds. They raise capital like a close‑ended fund but allow investors to redeem a portion of their holdings at predefined intervals (e.g., quarterly or semi‑annually).
During the redemption window, the fund calculates NAV and processes buy‑back requests, after which the unit price returns to the regular NAV until the next window. This structure provides a balance between liquidity and the ability to invest in less liquid assets.
For NISM, remember that the interval period and the percentage of units that can be redeemed are disclosed in the scheme’s offer document. Questions may test the maximum redemption cap per interval (often 10‑25% of total assets).
- Redemption only at set intervals.
- Limited redemption cap per window.
Exchange‑Traded Funds (ETFs)
ETFs are market‑linked funds that replicate an index, commodity, or sector and are listed on a stock exchange. Investors buy and sell ETF units through a broker just like equities, with price determined by market forces throughout the trading day.
Although ETFs are technically open‑ended funds, they employ a creation‑and‑redemption mechanism with authorized participants to keep the market price close to NAV. This mechanism reduces tracking error and ensures high liquidity.
Exam focus: differentiate between the NAV‑based pricing of traditional open‑ended funds and the market‑price based trading of ETFs, and recognise that expense ratios for ETFs are generally lower because of passive management.
- Listed on exchange – intra‑day price volatility.
- Creation/redemption by authorized participants maintains NAV‑price alignment.
Key Features of Different Mutual Fund Structures
| Scheme Type | Redemption Frequency | Exchange Listing | Typical Minimum Investment | Liquidity |
|---|---|---|---|---|
| Open‑Ended | Daily (T+2) | No | Rs. 1,000 – 5,000 | Very High – redeem any day |
| Close‑Ended | Only via secondary market | Yes (units listed) | Rs. 10,000 – 50,000 | Depends on market depth; may trade at premium/discount |
| Interval | At predefined intervals (e.g., quarterly) | No | Rs. 5,000 – 10,000 | Limited – only during windows, cap on % redeemed |
| ETF | Intra‑day (market price) | Yes (units listed) | Rs. 500 – 1,000 (brokerage applicable) | High – can trade any market hour |
Where:
TA= Total assets of the scheme in rupeesL= Total liabilities of the scheme in rupeesN= Number of units outstandingWorked Example
Given TA = 100,00,000, L = 5,00,000, N = 10,00,000: Step 1: NAV = (100,00,000 - 5,00,000) / 10,00,000 Step 2: NAV = 95,00,000 / 10,00,000 = 9.5 rupees per unit Verification: (100,00,000 - 5,00,000) / 10,00,000 = 9.5.
Where:
E= Total annual operating expenses in rupeesA= Average net assets of the scheme in rupeesWorked Example
Given E = 2,00,000 and A = 20,00,00,000: Step 1: Expense Ratio = (2,00,000 / 20,00,00,000) × 100 Step 2: Expense Ratio = 0.00001 × 100 = 1% Verification: (2,00,000 / 20,00,00,000) × 100 = 1%.
Typical Expense Ratios Across Scheme Types
Scenario
Ramesh wants to invest Rs. 50,000 in the Nifty 50 index. He can either buy units of an open‑ended index fund (NAV = Rs. 50) or an ETF (market price = Rs. 51). The open‑ended fund has an entry load of 0% and an expense ratio of 1.2%, while the ETF has a brokerage cost of Rs. 50 and an expense ratio of 0.5%. Both have the same tracking error.
Solution
Open‑ended purchase: Units = 50,000 / 50 = 1,000 units. No entry load, so cost = Rs. 50,000. Annual expense = 1.2% of 50,000 = Rs. 600. ETF purchase: Brokerage = Rs. 50, so amount available for units = 49,950. Units = 49,950 / 51 ≈ 979 units. Annual expense = 0.5% of 49,950 ≈ Rs. 250. Comparison: The ETF gives slightly fewer units but lower annual expense and higher liquidity. Over a 1‑year horizon, the ETF saves Rs. 350 in expenses, offsetting the small brokerage cost.
Conclusion
For short‑term investors, the ETF’s lower expense ratio and exchange liquidity often outweigh the marginally higher market price. The exam may ask which instrument provides higher net returns after accounting for all costs.
Regulatory & Compliance Aspects
SEBI (Securities and Exchange Board of India) governs all four schemes under the SEBI (Mutual Funds) Regulations, 1996. The regulations prescribe disclosure norms, minimum asset size, and the requirement to publish NAV daily on the AMFI portal.
Open‑ended funds must maintain a minimum liquid asset ratio of 20% of total assets. Close‑ended funds need to obtain a listing approval from the stock exchange and must disclose the market price alongside NAV. Interval funds are required to specify the redemption window and cap in the offer document, and they must obtain SEBI’s prior approval for the interval schedule.
ETFs, being listed products, must comply with both mutual fund regulations and the Securities Contracts (Regulation) Act, 1956. They must also disclose their creation‑redemption mechanism and maintain a tracking error limit of 0.5% as per SEBI guidelines.
- Daily NAV disclosure is mandatory for all schemes.
- Liquidity requirements differ: 20% liquid assets for open‑ended, market‑driven liquidity for close‑ended and ETFs, periodic windows for interval.
Students often mix up the minimum subscription amount (set by the AMC) with the SEBI‑mandated minimum net asset value of Rs. 1 crore for a scheme’s launch. Both are separate requirements.
Scenario
Anita bought 5,000 units of a close‑ended fund at a market price of Rs. 105 when NAV was Rs. 100. After a 6‑month lock‑in, the market price fell to Rs. 98 while NAV remained Rs. 100. She decides to sell her units on the exchange.
Solution
Sell price = market price = Rs. 98 per unit. Proceeds = 5,000 × 98 = Rs. 4,90,000. If Anita had held an open‑ended fund instead, she could have redeemed at NAV = Rs. 100, receiving Rs. 5,00,000 (ignoring exit load). The loss of Rs. 10,000 illustrates the premium/discount risk inherent in close‑ended funds. The exam may ask for the effective redemption value or the impact of premium/discount on returns.
Conclusion
Close‑ended investors bear market‑price risk in addition to NAV movements, which is a key distinction tested in NISM questions.
⭐Exam Takeaways
- Open‑ended schemes allow daily purchase/redemption at NAV (T+2 settlement).
- Close‑ended funds raise fixed capital, list on exchanges, and trade at market price which may differ from NAV.
- Interval schemes combine fixed capital with periodic redemption windows and caps on units redeemed.
- ETFs are listed, trade intra‑day, and use a creation‑redemption mechanism to keep market price close to NAV; expense ratios are usually lower.
- NAV = (Total Assets – Liabilities) ÷ Units Outstanding; expense ratio = (Annual Expenses ÷ Average Net Assets) × 100.
- SEBI mandates daily NAV publication, liquidity ratios (20% for open‑ended), and specific disclosure of redemption windows for interval funds.
- Common exam traps: confusing market price with NAV, overlooking T+2 settlement, and mixing minimum subscription with SEBI’s net asset launch requirement.
Practice Questions
8 questions on Open Ended Close Ended Interval Schemes and ETFs
Which of the following best describes an open‑ended mutual fund scheme?
What is the settlement cycle for redemption transactions in an open‑ended fund?
Which statement correctly compares the typical minimum investment amounts for open‑ended and close‑ended schemes?
Using the NAV formula (TA – L) ÷ N, what is the NAV per unit when total assets are Rs.100,00,000, liabilities Rs.5,00,000 and units outstanding 10,00,000?
Ramesh invests Rs.50,000 in either an open‑ended index fund (NAV Rs.50, entry load 0%, expense ratio 1.2%) or an ETF (market price Rs.51, brokerage Rs.50, expense ratio 0.5%). Ignoring other costs, which instrument yields a higher net amount after one year?
Anita bought 5,000 units of a close‑ended fund at a market price of Rs.105 when NAV was Rs.100. After a 6‑month lock‑in, the market price fell to Rs.98 while NAV stayed Rs.100. What is the difference in proceeds if she had held an open‑ended fund instead of the close‑ended fund?
What liquidity requirement does SEBI prescribe for open‑ended schemes?
Which mutual fund structure is listed on a stock exchange and trades throughout the market day at a price determined by supply and demand?