Open to investment whenever you are! Open-ended funds are like investment pools that you can jump into (buy units) or climb out of (sell units) anytime. There is no set end date, so you can stay invested for as long or short of time as you need. Let us understand open ended funds, explore how they work, their advantages and disadvantages, and the key differences that set them apart from close ended funds.
What are open ended funds?
Open ended funds are a type of mutual fund that allows investors to buy and sell units at any time, based on the current Net Asset Value (NAV). Unlike close ended funds, which have a fixed maturity period and limited entry and exit points, open ended funds provide continuous liquidity. This means that investors can enter or exit the fund as per their convenience, making it an ideal choice for those seeking flexibility.
How do open ended funds work?
Like all the other Mutual funds, open ended funds also pool money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, or a mix of both. The fund's NAV is calculated daily based on the market value of its underlying assets. Investors can buy units directly from the fund house at the current NAV and can sell units in the market whenever they choose.
Advantages and disadvantages of open-ended funds
Here are some advantages and disadvantages of open-ended mutual funds:
Advantages
- Liquidity: Investors can buy or sell units at any time, offering quick access to their funds.
- Diversification: Open ended funds provide diversification by investing in a variety of assets.
- Professional Management: Experienced fund managers make investment decisions to optimize returns.
- Convenience: The ability to invest with small amounts through Systematic Investment Plans (SIPs) makes it convenient for all investor types.
Disadvantages
- Market Risk: Open ended funds are subject to market fluctuations, impacting the value of the investment.
- Fees: Expense ratios and management fees can affect overall returns.
- Overtrading: Frequent buying and selling may lead to transaction costs and impact returns.
- Exit load: While selling units of mutual funds, a fee is applicable called exit load, which is often a percentage of the unit's value, this can potentially reduce the returns.
Types of open ended funds
Asset class-wise, open-ended mutual funds are categorised into:
- Large-cap fund
- Multi-cap fund
- Large and mid-cap fund
- Small-cap fund
- Mid-cap fund
- Contra fund
- Sectoral fund or thematic fund
- Equity-linked saving scheme
- Value fund
Specialty-wise, these funds fall into various types of open-ended mutual funds:
- Fund of funds
- Index funds
- Asset allocation funds
- Retirement funds
- Commodity funds or hedge funds
- Children funds
For debt mutual funds, the classifications include:
- Ultra short-duration fund
- Short or Medium duration fund
- Money market fund
- Balanced fund or hybrid fund
- Overnight fund
- Credit risk fund
- Liquid fund
- Long-duration fund
- Banking and PSU fund
- Corporate bond fund
Key differences between open ended funds and close ended funds
- Open ended mutual funds provide high liquidity, while close-ended ones lack liquidity during their lock-in period.
- Investment flexibility is higher in open ended mutual funds, allowing participation through SIP or lump-sum investments, whereas close-ended funds permit investment only during the NFO (new fund offer) period.
- Investors in open-ended funds can scrutinise the track records of scheme performances, a feature not available in close-ended funds.
- The advantage of rupee cost averaging of unit prices can be leveraged in open ended mutual funds, setting them apart from close-ended funds.
