The single most examined structural distinction in SEBI mutual fund law is the divide between an open-ended scheme and a close-ended scheme. It is not a marketing label. The classification dictates how units are bought and sold, whether the scheme must be listed, how the price is fixed against Net Asset Value, when investors may exit, and how the scheme is ultimately wound up. Every one of these consequences flows from a handful of definitions and operative provisions in the SEBI (Mutual Funds) Regulations, 1996, read with the landmark winding-up jurisprudence in Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg. This chapter dissects the statutory text, traces the 2009 and 2017 reforms that hardened the boundary, and shows how examiners test the difference.

The core statutory definitions

The entire distinction rests on two definitions in Regulation 2 of the SEBI (Mutual Funds) Regulations, 1996. An open-ended scheme is defined as a scheme of a mutual fund which offers units for sale without specifying any duration for redemption. A close-ended scheme is defined as any scheme of a mutual fund in which the period of maturity of the scheme is specified. The pivot, therefore, is the presence or absence of a stated maturity date. An open-ended scheme is perpetual and continuously available for subscription and repurchase; a close-ended scheme has a fixed corpus raised during a New Fund Offer (NFO) and a fixed tenure at the end of which the scheme is redeemed.

This definitional pivot is not cosmetic. Because an open-ended scheme transacts directly with investors on a continuous basis, its unit capital is variable, expanding when investors subscribe and contracting when they redeem. A close-ended scheme, having raised a fixed sum during the NFO, has a fixed unit capital that does not change with investor sentiment thereafter. From this single difference flow every downstream consequence in this chapter: liquidity mechanics, mandatory listing, NAV-linked pricing, and the conditions for exit. For the foundational vocabulary of trusts, sponsors and asset management companies that frames these schemes, see Introduction to Mutual Funds in India.

Liquidity and the subscription window

The most practically important contrast is liquidity. An open-ended scheme is, by definition, available for sale and repurchase on a continuous basis. An investor may enter on any business day and exit on any business day, transacting directly with the asset management company at a price linked to that day's NAV. There is no fixed pool of investors and no waiting for a maturity date.

A close-ended scheme is fundamentally different. Units can be purchased only during the NFO window, which is the limited initial offer period. Once that window closes, the scheme's corpus is sealed. The investor cannot return to the AMC to buy more units, and historically could only seek repurchase at limited intervals. The trade-off is portfolio stability: because the corpus is fixed, the fund manager of a close-ended scheme is not forced to hold cash to meet daily redemptions and can invest the full corpus for the scheme's tenure without worrying about sudden outflows. This makes close-ended structures attractive for illiquid or longer-horizon strategies, but it also means the investor bears the cost of reduced liquidity. The governance machinery that supervises how the AMC manages this fixed corpus is examined in Asset Management Company.

Mandatory listing of close-ended schemes

To compensate for the absence of continuous repurchase, the Regulations require that close-ended schemes provide an exchange route for exit. Regulation 32 mandates that every close-ended scheme be listed on a recognised stock exchange within six months from the closure of the subscription period. The logic is straightforward: if the investor cannot sell units back to the fund, the investor must at least be able to sell them to another buyer on a stock exchange.

The Regulations carve out exceptions to compulsory listing. Where a close-ended scheme provides a periodic repurchase facility to unitholders with the relevant details disclosed in the offer document, or where the scheme is to monthly income or insurance-linked categories, listing may not be mandatory. An open-ended scheme, by contrast, is generally not listed, because the AMC itself provides continuous two-way liquidity at NAV-linked prices; an exchange quote would be redundant when the issuer stands ready to repurchase every business day. The listing requirement is thus the structural mirror image of the open-ended scheme's continuous repurchase obligation.

Repurchase and NAV-linked pricing

Pricing is where the two structures diverge in technical detail. For an open-ended scheme, the sale and repurchase prices are tied closely to NAV. The Regulations require that the repurchase price not be lower than 93% of the NAV and the sale price not be higher than 107% of the NAV, with the difference between the repurchase and sale prices not exceeding 7% calculated on the sale price. These caps prevent the AMC from imposing punitive spreads on investors who transact directly with the fund.

For a close-ended scheme, where the AMC at its option may repurchase or reissue repurchased units, the Regulations require that the repurchase price not be lower than 95% of the NAV. The tighter floor reflects that close-ended repurchases, where permitted, are a concession rather than a continuous obligation, and the regulator wishes to ensure the exiting investor receives close to fair value. In both structures, NAV is the anchor; what differs is the permitted band and the frequency at which transactions occur. The day-to-day computation and disclosure of NAV, and the valuation norms behind it, sit alongside the conduct restrictions discussed in Restrictions on AMC Business Activities.

A point of frequent confusion is the relationship between NAV-linked pricing and the market price of a listed close-ended scheme. Once a close-ended scheme is listed under Regulation 32, its units trade on the exchange at a price set by supply and demand, which can and often does diverge from NAV. In practice close-ended units have historically traded at a discount to NAV, because the holder cannot redeem with the fund and must accept whatever a buyer on the exchange will pay. This discount is the practical cost of the structure's reduced liquidity, and it is precisely why the 2009 reform paired the prohibition on early repurchase with compulsory listing: the exchange price, even at a discount, is the investor's realistic exit value before maturity. An open-ended investor, by contrast, always receives the NAV-linked repurchase price from the fund itself and never faces a market discount, which is the single clearest illustration of why open-ended structures dominate the retail market.

The 2009 reform: no early repurchase

A decisive hardening of the boundary came with the SEBI (Mutual Funds) (Amendment) Regulations, 2009. Before this amendment, close-ended schemes often offered investors a repurchase or buy-back facility at intervals, which blurred the structural line and allowed the AMC to manage exits in an ad hoc way. The 2009 amendment provided that units of a close-ended scheme, other than those of an equity linked savings scheme, launched on or after the commencement of the amendment shall not be repurchased before the end of the maturity period of such scheme.

The reform was paired with strengthened mandatory listing. The regulatory bargain was explicit: a close-ended investor who needs liquidity before maturity can no longer demand a buy-back from the fund, but can sell units on the stock exchange where the scheme is listed. This severed close-ended schemes cleanly from open-ended ones and removed the hybrid practice of intra-tenure repurchase. Contemporary reporting at the time described it as SEBI restricting early exits from close-ended funds and forcing the exchange route instead. For examinees, the takeaway is precise: post-2009, repurchase before maturity by the fund is prohibited for close-ended schemes (ELSS excepted), and the stock exchange is the designated liquidity venue.

Conversion from close-ended to open-ended

The Regulations permit a one-directional structural change. Under Regulation 33, a close-ended scheme may be converted into an open-ended scheme, but only if two conditions are satisfied: the offer document of the scheme discloses the option and the period of conversion, or the unitholders are otherwise provided with an option to redeem their units in full at NAV-based prices. The protective principle is consent and exit: an investor who bought into a fixed-tenure product cannot be silently converted into a perpetual one, so the law guarantees the dissenting investor a clean exit before the conversion takes effect.

The reverse conversion, from open-ended to close-ended, is not contemplated in the same facilitative way, because it would trap investors who entered a continuously liquid product into a fixed-maturity one against their expectations. This asymmetry illustrates the regulator's consistent theme across the Regulations: structural changes that reduce investor liquidity demand heightened protection, whereas changes that increase liquidity are easier to permit.

Rollover and redemption at maturity

What happens when a close-ended scheme reaches its stated maturity? The default rule is full redemption. The Regulations provide that a close-ended scheme shall be fully redeemed at the end of the maturity period. The AMC may, however, roll over the scheme for a further period, but only for those unitholders who give their consent in writing and after following the process of filing the offer document afresh. Crucially, the units of unitholders who have not given written consent must be redeemed in full at the NAV-based price prevailing on the maturity date.

This is the same consent-and-exit architecture seen in conversion. A rollover cannot be imposed on a captive investor base; only those who affirmatively opt in carry forward, and everyone else is paid out at maturity NAV. Open-ended schemes have no analogue, because they have no maturity date and therefore nothing to roll over; they simply continue in perpetuity until wound up. The duties of the trustees in supervising a rollover, ensuring fresh disclosure and protecting non-consenting investors, connect to the broader fiduciary framework in Trustee Constitution and Duties.

Interval schemes: the hybrid

Between the two poles sits the interval scheme, a hybrid recognised by SEBI. An interval scheme behaves like a close-ended scheme for most of the year but becomes open-ended during specified transaction periods, during which investors may subscribe and redeem at NAV-linked prices as if it were an open-ended scheme. The transaction periods are tightly regulated: each specified transaction period must be for a minimum of two days, and there must be a minimum gap of fifteen days between two transaction periods.

The interval structure was given sharper definition by SEBI's 2017 categorisation reform discussed below, which treated open-ended, close-ended and interval as the three statutory modes of a scheme's structure. For an examiner, the interval scheme is the classic trap: it is neither continuously liquid like an open-ended scheme nor entirely locked until maturity like a close-ended scheme, but offers periodic liquidity windows. The defining numbers, minimum two-day windows and minimum fifteen-day gaps, are frequently tested.

The interval scheme also inherits a hybrid set of operational consequences. Because units are tradable on an exchange in the manner of a close-ended scheme but redeemable at NAV during the transaction periods like an open-ended one, the offer document must clearly disclose the dates and duration of each transaction period in advance so that investors can plan their entry and exit. Subscriptions and redemptions outside the specified transaction periods are simply not permitted, and the fund manager is entitled to assume a stable corpus between windows, much like a close-ended manager. SEBI's investor-education material describes interval funds precisely as a variant of close-ended funds that become open-ended during specified periods, capturing the dual character that makes them a recurring source of confusion, and of examination questions, in practice.

The 2017 categorisation circular

A major rationalisation came through SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated 6 October 2017 on categorisation and rationalisation of mutual fund schemes. While its primary purpose was to standardise scheme categories such as large-cap, mid-cap and liquid so that an investor could compare like with like across fund houses, it confirmed the three structural modes in which any scheme may be launched: open-ended, close-ended or interval.

The circular required mutual funds to submit their categorisation proposals after obtaining trustee approval, with a deadline that fell in December 2017, and to merge or reclassify overlapping schemes. For the present topic, the circular is significant because it sits on top of the structural definitions in the Regulations: the open-ended versus close-ended distinction governs the mechanics of liquidity and exit, while the 2017 categorisation governs the content and comparability of the portfolio. The two layers must be read together, and the foundational regulatory architecture into which both fit is surveyed in SEBI (Mutual Funds) Regulations, 1996.

Winding up and the Franklin Templeton case

The winding up of schemes brought the structural distinction into sharp constitutional focus in the most significant mutual fund litigation in recent memory. In April 2020, the trustees of Franklin Templeton Mutual Fund abruptly wound up six debt schemes citing illiquidity in the underlying corporate bond market triggered by the COVID-19 pandemic. The decision was challenged, and the matter reached the Supreme Court in Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg.

The central question was the interpretation of Regulation 18(15)(c), which requires the trustees to obtain the consent of the unitholders when the majority of trustees decide to wind up a scheme or prematurely redeem the units. By its judgment of 12 February 2021, reported as Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88, the Supreme Court held that the consent of the unitholders for the purpose of Regulation 18(15)(c) means the consent of the majority of the unitholders who have participated in the poll, and not the consent of the majority of all the unitholders of the scheme. The Court reasoned that the object of the provision is to inform unitholders of the reasons for winding up and to give them an opportunity to accept or reject the proposal, not to render winding up an impossibility by demanding an unattainable absolute majority.

The practical consequences of the judgment were considerable and are directly examinable. The Court upheld the e-voting exercise conducted for the six schemes, validating electronic polling as an acceptable mode of obtaining unitholder consent. It confirmed that consent is counted on a simple majority of unitholders present and voting, on the basis of one vote per unit held. In a subsequent order on 14 July 2021, the Court addressed the distribution of proceeds and observed that certain provisions of the Regulations, including the winding-up machinery, were a grey area requiring greater clarity from SEBI, prompting the regulator to refine its framework.

Following the litigation, SEBI tightened the procedure: trustees must obtain unitholder consent by simple majority of those present and voting before winding up a scheme or prematurely redeeming a close-ended scheme, must publish the voting results within a defined period, and if consent is not obtained the scheme must reopen for business. The case is therefore the leading authority on the meaning of consent in Regulation 18(15)(c) and links the winding-up regime directly to the open-ended versus close-ended divide, since premature redemption is a structural event most acute for close-ended schemes.

Minimum investor norms

Both structures are subject to a minimum diversification of ownership designed to prevent a scheme from becoming a private vehicle for one or a few large investors. SEBI's framework requires that each scheme and each individual plan under a scheme have a minimum of twenty investors, and that no single investor account for more than twenty-five per cent of the corpus of the scheme or plan. These thresholds must be complied with on an ongoing basis, not merely at launch.

The application differs subtly between structures. For an open-ended scheme, where the corpus fluctuates daily, the AMC must monitor the twenty-five per cent ceiling continuously and rebalance if a single investor's holding breaches it, typically by giving the investor a window to reduce the holding or by rebalancing within a prescribed period. For a close-ended scheme, the corpus is fixed at NFO, so the test is principally assessed by reference to the subscription at the close of the offer and during the scheme's life. The policy purpose is identical for both: a mutual fund is a pooling vehicle for the public, and these norms preserve its genuinely collective character.

Where the ceiling is breached in an open-ended scheme, the consequence is not automatic illegality but a duty to cure. The AMC must, within a prescribed period, either rebalance the portfolio so that the offending investor's proportion falls below the twenty-five per cent cap or compulsorily redeem the excess units of that investor at the applicable NAV. If the minimum of twenty investors is not maintained, the scheme is treated as having failed the eligibility floor and the AMC is obliged to refund the subscription or wind the scheme down, ensuring that a scheme cannot quietly degenerate into a bespoke portfolio for a handful of large holders. These norms therefore operate as a continuous integrity test rather than a one-time launch condition.

Where the public-issue line is drawn

The structural definitions also matter for the boundary between a regulated mutual fund scheme and an unregulated public collection of money. The Supreme Court's decision in SEBI v. Sahara India Real Estate Corporation Ltd., (2013) 1 SCC 1, though concerned with optionally fully convertible debentures rather than mutual fund units, established the foundational principle that an entity cannot escape securities regulation by labelling a public fund-raising as something else. The Court held that the OFCDs were securities and that a collection from a large number of the public attracted SEBI's jurisdiction and the listing discipline of the securities laws.

The relevance to the present topic is conceptual. A close-ended scheme raises a fixed corpus from the public during an NFO and must be listed; an open-ended scheme continuously offers units to the public. In both, the public character of the offering is what triggers the full weight of SEBI regulation, including the registration, disclosure and listing obligations. Sahara is the doctrinal anchor for the proposition that public collection equals regulatory oversight, a proposition that underlies the entire architecture of the mutual fund Regulations and the eligibility gatekeeping examined in Sponsor Eligibility and Role.

Exam strategy and takeaways

For judiciary and CLAT-PG candidates, the open-ended versus close-ended distinction is best mastered as a chain of consequences flowing from one fact: does the scheme specify a maturity period? If yes, it is close-ended, the corpus is fixed, units sell only during the NFO, the scheme must be listed within six months under Regulation 32, repurchase before maturity is barred post-2009 (ELSS excepted), and at maturity the scheme is redeemed unless rolled over with written consent. If no, it is open-ended, perpetually liquid, repurchased continuously at NAV within the 7% spread, and not ordinarily listed.

The high-value cross-cutting points are the interval scheme's two-day minimum window and fifteen-day minimum gap; the conversion and rollover rules that always protect the dissenting investor with a full-value exit; and the winding-up consent rule from Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88, that consent means the majority of those who vote, not an absolute majority of all unitholders. Memorise the regulation numbers, the percentages and the case citations precisely, because that is exactly the granularity at which this topic is tested. To revisit the umbrella framework these rules sit within, return to the SEBI Mutual Funds and AIF Regulations hub.

Frequently asked questions

What is the single defining difference between an open-ended and a close-ended scheme?

Whether the scheme specifies a maturity period. Under Regulation 2 of the SEBI (Mutual Funds) Regulations, 1996, an open-ended scheme offers units for sale without specifying any duration for redemption, whereas a close-ended scheme is one in which the period of maturity is specified. Everything else, liquidity, listing, pricing and exit, flows from this.

Must a close-ended scheme be listed on a stock exchange?

Yes. Regulation 32 requires every close-ended scheme to be listed on a recognised stock exchange within six months from the closure of the subscription period, subject to limited exceptions (such as schemes offering a disclosed periodic repurchase facility). Listing provides the exit route since the fund itself does not continuously repurchase units.

Can a close-ended scheme repurchase units before maturity?

Generally no. After the SEBI (Mutual Funds) (Amendment) Regulations, 2009, units of a close-ended scheme (other than an equity linked savings scheme) launched on or after the amendment cannot be repurchased before the end of the maturity period. Investors needing liquidity must instead sell on the stock exchange where the scheme is listed.

What did the Supreme Court decide in the Franklin Templeton case?

In Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88 (12 February 2021), the Court held that consent of unitholders under Regulation 18(15)(c) for winding up a scheme means the consent of the majority of unitholders who participated in the poll, not an absolute majority of all unitholders. It also validated e-voting and the one-vote-per-unit basis.

What is an interval scheme?

An interval scheme is a hybrid that behaves as close-ended for most of the year but becomes open-ended during specified transaction periods, when investors may subscribe and redeem at NAV-linked prices. Each transaction period must last a minimum of two days, with a minimum gap of fifteen days between two consecutive transaction periods.

How is a close-ended scheme rolled over at maturity?

A close-ended scheme is fully redeemed at the end of its maturity period by default. It may be rolled over only for unitholders who give written consent and after filing a fresh offer document; the units of unitholders who do not consent must be redeemed in full at the NAV-based price prevailing on the maturity date.