Open Ended Mutual Funds

An open-ended fund is a type of mutual fund scheme that allows investors to buy or sell units at any time, offering flexibility and liquidity. There is no fixed maturity period, meaning you can invest or redeem your units whenever you choose, based on your financial goals or market conditions.
EXPLORE FUNDS
What are Open Ended Mutual Funds
EXPLORE FUNDS
4 mins read
18-September-2024

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:

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.

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Frequently Asked Questions

Is SIP possible in open ended funds?

Yes, you can invest in open-ended mutual funds through a Systematic Investment Plan (SIP). This method allows you to contribute fixed amounts at regular intervals, making it a convenient option for building wealth over time, while benefiting from market fluctuations through rupee cost averaging.

Which is better open-ended or closed ended funds?

The choice between open-ended and closed-ended funds depends on your investment goals. Open-ended funds offer liquidity and flexibility, while closed-ended funds may provide fixed terms and limited redemption periods. Each type has its advantages, making the decision personal to your financial objectives.

Is it good to invest in open ended mutual fund?

Investing in open-ended mutual funds can be a good choice for investors seeking flexibility, liquidity, and professional management of their portfolios.

How do I know if a mutual fund is open-ended?

You can check the fund's prospectus or consult the fund house to confirm if a mutual fund is open-ended. Open-ended funds are common and allow investors to buy and sell units any time. Additionally, the prospectus will typically state whether a fund is open-ended or closed-ended.

Do open-ended funds have NAV?

Yes, open-ended funds have a daily calculated Net Asset Value (NAV), which represents the per-unit price of the fund. NAV reflects the market value of the underlying securities, and investors can buy or sell units based on the latest NAV. It ensures transparent pricing for transactions.

What is the difference between open-ended funds and mutual funds?

Open-ended funds are a type of mutual fund. The key difference lies in their structure. Open-ended funds have no limit on outstanding shares and allow ongoing purchases and redemptions. In contrast, closed-end mutual funds have a fixed number of shares offered during an initial public offering (IPO) and trade on exchanges like stocks.

What is the lock-in period for open-ended mutual funds?

Open-ended mutual funds does not have lock-in periods. You can redeem your units (sell) at any time after considering any exit load charges. This flexibility is a major advantage of open-ended funds.

Are open-ended funds active or passive?

Open-ended funds can be either active or passive. Actively managed funds have a fund manager making investment decisions. Passively managed funds, like index funds, track a specific market index.

How do you calculate NAV for open-ended mutual funds?

NAV is calculated by dividing the fund's total net assets (value of all holdings) by the number of outstanding shares. This calculation typically happens at the end of each trading day.

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The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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