Open Ended Funds

Mutual Funds can be categorized based on their structure into three types: open-ended, closed-ended, and interval funds. Of these, open ended mutual funds are the most common and popular among investors.

Here, we will explore Open Ended Mutual Funds and talk about the different types of open ended funds in India along with their benefits and a lot more. 

Open Ended Funds Meaning

It is safe to say that when people say mutual funds, they mean open ended mutual funds. Unlike their closed ended funds, the units of open ended funds are not traded on the stock exchange. Further, there is no limit on the number of units that the fund can issue.

Investors can purchase or redeem units from the fund house on any working day at the existing Net Asset Value or NAV of the scheme.

The NAV is determined by the performance of the underlying securities of the fund. These schemes do not have a maturity period.

Advantages of Open Ended Mutual Funds

Here is a quick look at some advantages of open ended mutual funds-

  • Highly Liquid

As an investor, you can redeem the units of an open ended fund on any working day. This adds the necessary component of liquidity to your investment portfolio.

While there are many investment options available offering good returns, many of them have a lock-in period which renders your money illiquid until maturity.

With open ended mutual funds, you can enjoy maximum liquidity.

  • Performance over Different Market Cycles

Since investors can purchase or redeem units from the fund house in an open ended fund, a quick glance at the historical performance of the fund can offer a glimpse into how it has performed across different market cycles.

This helps you make an informed decision and invest according to your plan.

  • Availability of SIP

Since you can purchase units on any working day, you can set up a systematic investment plan or SIP to invest a fixed amount in the scheme on a regular basis.

This is particularly beneficial for salaried investors and people without an investible corpus on hand. Further, investing via SIP can also help you build a corpus from scratch.

Disadvantages of Open Ended Mutual Funds

Here is a quick look at some disadvantages of open ended mutual funds-

  • High Volatility

The NAV of an open ended mutual fund fluctuates according to the performance of its underlying securities. Hence, open ended funds are prone to market risks and highly volatile in nature.

While the fund manager endeavors to contain the volatility by diversifying his investments, these funds carry a certain degree of market risks at all times.

  • Huge Inflows and Withdrawals

Open-ended schemes, as opposed to closed-ended funds, are subject to huge inflows and withdrawals.

A quick outflow could cause a fund manager to sell units at unfavorable prices, resulting in a loss for all scheme investors.

  • Cash Flow Risks

Open-ended funds are also subject to market and cash flow risk. The NAV of these funds changes on a daily basis in reaction to market volatility.

Who Should Invest in an Open Ended Mutual Fund?

Open Ended Funds form the biggest part of the mutual fund market. Therefore, most investors can invest in open ended funds.

The only thing that they need to keep in mind is to invest according to their financial goals, risk tolerance, and investment horizon.

Tax on Open Ended Funds Gains

Gains on mutual funds are taxed. Also, debt and equity funds have different tax rules and rates.

Therefore, in the case of Open Ended Mutual Funds, the tax rules and rates vary with the percentage of investments made by the scheme in debt and equity. 

  • If the fund invests 65% of its total assets or more in debt instruments, then it is treated as a debt fund for tax purposes.

  • If the fund invests at least 65% of its total assets in equity, then it is treated as an equity fund for tax purposes. 

Ensure that you read the offer document carefully and check the asset allocation that the scheme plans to follow to understand the tax rates.

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