Open-Ended, Close-Ended and Interval Funds Compared

Three structures, one dividing line: the moment at which units may be brought into existence or taken out of it. A continuous scheme does it whenever money arrives or leaves. A fixed-tenure scheme does it twice, once at the start and once at the end. A stated-window scheme does it only while a window is open. Every other difference between the three is downstream of that one.

Most readers meet these three names as a list to memorise, and a list is exactly the wrong shape for them. The three names are not three unrelated inventions. Each one answers a single question that any pooled arrangement has to answer before it can open its doors: at what moments may the arrangement issue a new unit, and at what moments may it destroy one? Fix the answer to that one question and the other differences between the three stop being separate facts and start being consequences.

Consider a shared taxi that runs between two towns. In one version the driver picks up and sets down anywhere along the road, so the number of people in the vehicle changes minute by minute. In a second version the driver fills the seats at the starting point, locks the door, and opens it again only at the destination; a passenger who wants to leave early has to find somebody at the roadside willing to take the seat over, at whatever the two of them agree. In a third version the driver stops at three or four announced points and, at those stops only, people may get in or out. The road is the same road in all three. The seats are the same seats. Only the timing of the door differs, and every argument a passenger might have about getting out early traces back to that timing.

One pool runs through this guide from end to end. The structure is then the only thing changing. Girnar Asset Management Limited operates the Girnar Large Cap Equity Fund, with net assets of Rs 4,200 crore against 120.00 crore units outstanding. Divide the first by the second and one unit is worth Rs 35.00 exactly. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations. The trustee company, the custodian, the registrar and transfer agent, the auditor and the distributor sit around that scheme by role.

Three things are settled elsewhere and carry into what follows. The continuous form and its creation and cancellation mechanism are covered under the open-ended fund. The unit itself, the value per unit and the arithmetic that keeps every holder on identical terms were settled with the pooled vehicle. Who the five parties are and what each of them is for was settled with the trustee. The third structure is genuinely new here, along with where it sits between the other two. The third form is neither of the others, and it is not a fourth invention either.

Four criteria do the work, applied to all three forms without changing a word between them. When units may be created or cancelled. Whether the count of units drifts or holds still. Who a holder is actually transacting with. Where the price of that transaction comes from. The first of those four produces the other three. Learn the first one properly and the rest never have to be memorised.

What does a continuous scheme do, taken by itself?

An open-ended schemeA pooled scheme whose unit count rises and falls with the money coming in and going out, because it makes and destroys units on demand. makes a unit for money handed in and destroys a unit for money taken back. That mechanism is the whole of it. The scheme is standing there as the party on both sides: it sells a holder into the pool and it buys a holder out of the pool, and neither transaction needs a second investor to exist. Girnar Asset Management Limited runs the Girnar Large Cap Equity Fund on exactly this basis. The record for the scheme carries 120.00 crore units today and would carry a different figure after a day of heavy purchases.

Two consequences follow immediately and both matter later. First, a cancelled unit has to be paid for out of the assets, so the pool itself finds the money for every exit. Second, the price is not agreed with anybody. The price falls out of a division: net assets over units. Nobody negotiates with an open pool. The arithmetic has already decided, and there is nothing left to negotiate with. That mechanism is worked through step by step under the open-ended fund, and is taken here as settled and used as one of three readings.

What does a fixed-tenure scheme do, taken by itself?

A close-ended schemeA pooled scheme that issues its units in one go at the start and cancels them in one go at the end, holding the count still in between. issues its units once, when the scheme is launched and money is collected. After that the issuing stops. No further unit is created however much demand appears, and no unit is cancelled however much a holder wants out, until the scheme reaches its maturityThe stated end of a scheme with a fixed life, at which the holdings are turned into money and the proceeds go out to holders., at which point the holdings are turned into money and paid out and the units are cancelled together. Between those two moments the count of units is a constant.

One distinction here is where nearly everybody slips. The scheme not cancelling a holder's units is not the same statement as the holder being unable to leave. Not cancelling is a statement about who the counterparty is. In a fixed pool the scheme has taken itself off the other side of the trade, so an exit before maturity requires a different party entirely: another investor who wants in. Whether such a party can be reached, on what terms and through which arrangement, is set by the Securities and Exchange Board of India (SEBI) rather than decided by the manager.

One further consequence deserves saying out loud now rather than later. Where units of a fixed pool change hands between investors, the amount paid is whatever the two sides settle on. The amount is not produced by the scheme's division of net assets by units. So the scheme can be computing one figure while transactions happen at another. The two answer different questions, so they are allowed to differ. The scheme's figure reports the pool's value per unit. The traded amount reports what one buyer will hand over today. The size of any gap between those two, in either direction, is not on this record.

What does a scheme with transaction windows do, taken by itself?

The third form is the one that needs placing properly. An interval schemeA pooled scheme that keeps its unit count still most of the time and opens for dealing during announced periods, so it switches between two ways of behaving. holds a settled pool for most of its life and opens for dealing during announced periods called transaction windowsAnnounced periods during which a scheme that is otherwise settled accepts money in and pays money out against its own units.. While a window is shut, no unit is created and no unit is cancelled, and a holder who wants money has to look outside the scheme for it. While a window is open, the scheme creates and cancels units against itself the way a continuous pool does, and a holder deals with the scheme directly.

So the third structure is not a third invention sitting alongside the other two; it is those two same behaviours, alternating, with a calendar deciding which one a holder walks into. That single sentence is the reason all three belong together rather than in three separate accounts. Once the continuous form and the fixed form are understood properly, the third costs nothing extra. The third form adds no new mechanism, only a switch between the other two.

The everyday version is a co-operative store that settles its member list once a year. On the two days the register is open, anyone may join by paying in and any member may leave by being paid out, and the store handles both itself. On every other day of the year the member list is frozen: a member who wants out must find somebody willing to take the membership over privately, and the store is not part of that conversation. Nothing about the store's shop, stock or accounts changes between those two states. The only thing that changes is whether the store is on the other side of the transaction.

How long a window stays open, how frequently one comes round, how much warning is given before one opens, and every other condition attached to one, are set by SEBI at sebi.gov.in and can be revised. A fixed reproduction of a period of that kind does not gently go out of date; it goes from correct to wrong on a day nobody announces, and the reader has no way to know which side of that day they are on.

At which moments may a unit be created or destroyed?

Creation and destruction is the parent criterion, and the three answers are: at any moment, at two moments, or at announced moments. A continuous pool is permanently able to issue and to destroy. A fixed pool can do both, but only twice in its life, and those two occasions sit at opposite ends of it. A windowed pool can do both repeatedly, but only while a window stands open.

Treat the remaining three criteria as consequences rather than as separate facts. Fix when the pool may issue and destroy units, and who the holder deals with, whether the count moves, and where the price comes from are all already decided. If a scheme may cancel a unit today, then the scheme itself can be the party buying a holder out today, and the amount it pays has to come from a valuation rather than a haggle, and the count of units necessarily moves as it does so. If it may not cancel a unit today, then it cannot be that party, so somebody else has to be, and that somebody will want to agree a price. Nothing else is doing any work.

There is something the criterion does not say. The criterion says nothing about how quickly a holder can turn units into money, and nothing about how much they get. A pool that can cancel a unit any day still has to find the money to pay for it, and the arrangements for a pool that has run into difficulty are a SEBI matter, covered separately. Continuous dealing is a statement about mechanism, not a statement about outcome.

Is the number of units moving, settled, or something in between?

Three answers again, and they line up with the first criterion exactly because they are produced by it. In a continuous pool the count moves: the Girnar Large Cap Equity Fund's 120.00 crore units is a photograph taken at one moment, not a property of the scheme. In a fixed pool the count is a constant, established once and then held for the whole life of the scheme. In a windowed pool the count is a constant that is allowed to be revised, and only at announced moments.

The answer changes what the person running the pool is working with. A moving count means the size of the pool is decided partly by holders and only partly by the manager. A settled count means the size of the pool is a known quantity that nobody outside the scheme can alter. Kalyani Bhagat, who manages the equity scheme, is working against a figure that other people can change on any day. A manager of a fixed pool is working against a figure that is simply given. How a pool is actually run under a moving count and under a settled one is covered under the open-ended form set against the close-ended form.

There is a quiet accounting point buried here too. A settled unit count does not mean a settled pool value. The Girnar Broad Market Index Fund and the equity scheme both revalue their holdings as prices move, and so would a fixed pool. The denominator is held still, not the numerator. Confusing the two produces the belief that a fixed pool has a fixed value. No structure makes that claim.

Who is on the other side when a holder leaves?

The counterparty criterion is the one almost nobody thinks to ask about, and it decides how leaving actually feels. Every exit has a party on the other side of it. The party standing there, the counterpartyWhoever stands on the opposite side of a transaction and provides the money or the units it requires., is the scheme itself in a continuous pool, is another investor in a fixed pool, and is one or the other in a windowed pool depending on the date the holder happens to want out.

The difference shows through something ordinary. Returning a shirt to the shop that sold it means dealing with the shop; no stranger who wants the shirt has to be found, and the amount refunded is set by the shop's own rule rather than by a conversation. Selling a second-hand scooter is a different matter. There is no shop. A person has to be found, that person has to want a scooter this week, and the amount is whatever the two of them settle on. Both are exits, and the entire difference between them is who is standing on the other side.

Which is why the honest way to read a structure is not through its name but through this question: when the money is wanted back, who is obliged to be there, and who merely might be? In a continuous pool the scheme is on the other side by construction. In a fixed pool it is not, and no arrangement can make it so before maturity. In a windowed pool it is there while a window stands open and it is not there at any other time. None of that says a holder will find the exit easy, cheap or quick in any of the three.

Where does the transaction price actually come from?

Two of the three cases produce an arithmetic result and the third produces an agreement. Where the scheme is the counterparty, the amount is a computed value per unitThe scheme's own assets less what it owes, divided by the units in issue, which produces a figure rather than settling one.: net assets divided by units in issue. For the equity scheme that is Rs 4,200 crore over 120.00 crore units, or Rs 35.00. Nobody chose that. It fell out. Where another investor is the counterparty, the amount is a negotiated priceWhat a buyer actually hands over, arrived at between two parties rather than produced by a division.: whatever a buyer is willing to part with on the day and a seller is willing to accept.

Because those are answers to two different questions, they are free to disagree, and units of a fixed pool changing hands between investors can settle at an amount above or below the scheme's own computed figure. That is not a fault in either number. The computed figure asks what the pool holds per unit. The agreed amount asks what somebody will hand over today, and that depends on their view of the holdings, on how badly the seller wants out, and on how many buyers happen to be looking. The size and direction of any difference between the two are not on this record.

Whether the units of a fixed pool must be admitted to an exchange at all, where else they are permitted to move, and on what terms, are requirements SEBI sets. Where a holding is recorded in a depository account instead of as a folio entry on the register the registrar and transfer agent keeps, the transfer is recorded through that account. The account sits at the National Securities Depository Limited (NSDL), nsdl.co.in, or Central Depository Services (India) Limited (CDSL), cdslindia.com.

What happens when one pool is run through all three forms?

Comparing structures only works if nothing else moves, so take one pool and change the structure alone. Girnar Asset Management Limited runs the Girnar Large Cap Equity Fund with net assets of Rs 4,200 crore and 120.00 crore units in issue. Divide: Rs 4,200 crore over 120.00 crore units is Rs 35.00 a unit, exactly, with no rounding on the way. The scheme is a continuous one on this record. The other two readings below are hypotheticals run on the identical figures. The structure is then the only variable in the comparison.

A holder wants out of 1.00 crore units. The request is one part in a hundred and twenty of the pool. Here is what each structure does with the same request.

Work the continuous row by hand rather than reading it. Rs 35.00 a unit times 1.00 crore units is Rs 35 crore going out of the door. Rs 4,200 crore less Rs 35 crore is Rs 4,165 crore of net assets left. 120.00 crore units less 1.00 crore units is 119.00 crore units left. And 119.00 times Rs 35.00 is Rs 4,165 crore, exactly the figure on the left, so the division comes back to Rs 35.00 a unit.

Two of these readings end with the same value per unit and only one of them ended with the same pool, and that is the whole comparison in a sentence. The continuous pool is Rs 35 crore lighter and one crore units smaller. The fixed pool did not move at all: no cash left it, no unit was cancelled, its holdings sat exactly where they were, and the only thing that changed was a name on the register the registrar and transfer agent keeps. Somebody was paid Rs 35 crore in the first reading by the scheme, and in the second by a different investor entirely.

Does the value per unit really refuse to move, or is that just algebra?

The steadiness is just algebra, and any reading that made more of it would be a false comfort. Consider what happened. The pool paid out at exactly the figure it had computed. Rs 4,200 crore was already 120.00 crore units multiplied by Rs 35.00, so taking away one crore units at Rs 35.00 removes Rs 35 crore from the top and 1.00 crore from the bottom, and a fraction whose top and bottom are both reduced in the same proportion is the same fraction. The exit was settled at the value per unit, so the value per unit was never going to move, whatever the size of the exit. The sum cannot report anything else.

The same warning applies to a check that looks independent and is not. A reader is tempted to say: the exit was 1.00 crore out of 120.00 crore units, one part in a hundred and twenty, and the money leaving was Rs 35 crore out of Rs 4,200 crore, also one part in a hundred and twenty, so the two agree. The two do agree, but they are not two findings. Rs 35 crore was produced by multiplying those same 1.00 crore units by the same value per unit, so the two are one sentence written twice. Two routes that share a multiplication cannot check each other.

Here is a check with actual content, one that can come out wrong: what would have to change for the value per unit to move? Suppose the pool had paid Rs 36.00 for units it was itself valuing at Rs 35.00. Rs 36 crore leaves the pool instead of Rs 35 crore, so Rs 4,200 crore less Rs 36 crore is Rs 4,164 crore, and 119.00 crore units are left. Rs 4,164 crore divided by 119.00 crore units is about Rs 34.99 a unit. The division does not come out even, so that figure is an approximation rather than an exact one. The holders who stayed are now worse off than they were, by a whisker, and the whisker came out of their pockets and went into the leaver's.

The unchanged Rs 35.00 was reporting one thing only: not that the pool is unharmed by exits, but that the scheme settles an exit at its own computed figure and thereby leaves everybody who stays exactly where they were. The figure is a statement about the settlement rule, not a statement about the pool's health. And in the fixed pool the same protection arrives by a completely different road: the value per unit is untouched there because the pool was never involved, so no rule about fairness had to do any work at all.

What is identical across all three forms?

Readers who have just learned four differences tend to overestimate how different the three things are, so it is worth counting the other side. Girnar Asset Management Limited would set up all three of these structures inside the same arrangement, with the same parties doing the same jobs. The trustee company holds the scheme in trust for the people holding its units, in all three. The custodian holds the securities, in all three. The registrar and transfer agent keeps the register of who holds what, in all three. The auditor audits the accounts, in all three.

Three more, and they matter as much. Each of the three has a written objective and a policy saying what its pool may and may not hold, and that document is what a holder is actually buying into. Each has to value its pool and publish the figure. A value per unit is not optional in any structure. And in each of the three the assets belong to the people holding the units, not to the manager: Girnar Asset Management runs them, and that is a different thing entirely from holding them for itself.

Set the seven shared features against the one difference. The honest summary is three settings of a single machine, not three machines. That is a useful thing to know before a conversation, because a reader who thinks a fixed pool is a fundamentally different animal will start asking whether it is supervised, whether somebody independent holds the assets, and whether there is a stated policy, when the answer to all three is the same as for the scheme they already hold.

Which is better: a route out the pool provides, or holdings nothing can compel to be sold?

Now the honest version: each side of this gives up precisely what the other keeps. A continuous pool is on the other side of a holder's exit, and the price of that is that the pool has to find the money, so the holdings can be disturbed by other people's decisions on a day that has nothing to do with that holder. A fixed pool cannot be made to sell anything to pay somebody out, and the price of that is that a holder's own exit depends on a buyer existing and on an amount the two parties agree, neither of which the scheme is responsible for.

Something is absent from both sides of that trade. Neither structure is safer. Neither produces a better return. A return is a property of the holdings and the manager, not of the mechanism by which units are made and destroyed. Neither one is a promise about value: continuous dealing does not stop a pool's assets falling, and a settled unit count does not protect anybody from the same thing. The structure decides what a holder is able to do and when, and nothing whatsoever about what the holding turns out to be worth.

The trade is real and worth understanding. Settling it needs facts about a specific person, so the structure alone cannot settle it.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.