Did you know that there exists a fund type where you can buy and sell units as per your own preferences? Yes! Open ended mutual funds offer unmatched flexibility. In the last decade, these fund schemes have found immense popularity amongst Indian investors. With these funds, you do not have to worry about making changes to your existing subscription. Come! Let’s know what is open ended mutual fund explanation and others in detail.
Open Ended Mutual Funds Meaning
An open ended fund is a mutual fund that has no fixed maturity date. The scheme’s NAV is declared every business day, and you, as an investor, can purchase or sell the units at the prevailing NAV per unit.
While closed-ended funds open only during the NFO (NFO meaning New Fund Offer) period for entry, and exit is allowed on specific maturity dates only, open ended funds provide much more flexibility in terms of buying and selling of fund units. In case you are wondering what is NFO in mutual fund. NFO stands for new fund offer. Both open ended and closed ended funds are offered through NFOs.
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Some characteristics of open ended mutual fund schemes are as follows:
- You can buy and sell fund units directly from the fund house based on the applicable NAV without depending on the secondary market.
- Ease of purchase makes them highly liquid financial instruments.
- When investors trade fund units, the overall size of the fund’s corpus changes. This gives fund managers a chance to invest in better and more rewarding areas.
- New investors can register at any time. Existing subscribers are allowed to subscribe to more (fresh) units.
- An open ended mutual fund scheme runs perpetually. That is, there is no fixed date of maturity or closure.
In summary, open ended mutual funds offer exciting opportunities to build wealth in the long term. Their flexible and dynamic features allow fund managers to invest agilely in new avenues.
Types of Open Ended Mutual Funds
There are more than 20 open ended mutual fund scheme categories in India. Each category invests in a specific class of assets and serves differing investment needs. The most popular open ended mutual funds in India can be divided into the following types.
1. Equity Funds
These funds diversify their portfolios across market capitalisation levels and sectors by investing in equity shares. Equity funds include large-cap funds, mid-cap funds, and sectoral funds.
2. Debt Funds
Fund managers invest the corpus of these funds in fixed-income instruments such as corporate bonds and government securities. Debt funds, one of the key features of mutual funds, provide the best option for investors who do not have an appetite for significant risk.
3. Hybrid Funds
These types of funds invest in both equities and debt instruments to mitigate the overall risk-return trade-off. Some key examples of hybrid funds include balanced funds and dynamic asset allocation funds.
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4. Solution-oriented Funds
You can cater to your financial goals, such as retirement or child education planning, with particular types of mutual funds known as solution-oriented schemes. Retirement plans and children’s educational plans are some of India’s most preferred solution-oriented mutual funds.
5. Passively Managed Funds
Passively managed funds, also known as index funds, try to replicate the returns of benchmark market indices like the Nifty 50 index.
In summary, there is no shortage of open ended funds in India. All you have to do is estimate your financial goals and risk appetite and find the right fund that suits your profile.
Key Features and Benefits
Some significant features and advantages of investing in open ended mutual funds are:
1. Professional Management
Fund managers and a research team with the right qualifications, experience, and credentials manage these funds. These individuals are experts in their field and can spot good investment opportunities among various asset classes.
2. Diversification
Open ended funds invest in a broad basket of securities across market caps, sectors, and risk ratings. This ensures the portfolio has appropriate diversification, mitigating the overall investment risk.
3. Liquidity
Since open ended funds have tenures with fixed maturities, this implies that these securities can quickly be sold (redeemed) directly to the fund houses. This makes them highly liquid for investors. Most importantly, your payment proceeds after you redeem your units are credited to your bank account within 1-3 business days.
4. Flexibility
With many financial instruments available for selection in the markets, these funds narrow down the choices available and assist investors in picking out what best suits their financial requirements and risk profiles. Besides, these schemes can be switched over or amalgamated into one conveniently if belonging to the same fund house.
5. Low-Value Tickets
Several mutual funds in India request a minimum investment of anywhere between ₹100-500, making it simple and more accessible for small retail investors and individual investors to participate.
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In summary, open ended mutual funds allow you to participate in capital markets in a more structured manner. They save you the effort of directly picking stocks.
Difference Between Open Ended and Close Ended Funds
Let us have a look at a table to understand the critical differences between open ended and close ended mutual funds.
| S.No. | Criterion of Difference | Open Ended Mutual Funds | Close Ended Mutual Funds |
| 1. | Entry and Exit Options |
|
|
| 2. | Fund Corpus | Dynamic | Fixed |
| 3. | Liquidity | High | Low |
| 4. | Duration | Perpetual | 1-5 years |
In summary, while open ended funds are perpetually available and more flexible, close ended mutual funds have a fixed tenure and offer only limited liquidity options.
Conclusion
Open ended mutual funds can be a promising investment avenue for retail investors who want to enter the capital market to build long-term wealth across different asset classes but lack the time or ability to engage in the direct selection of stocks.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
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FAQs
What are Open Ended Mutual Funds?
Open ended mutual funds are investment funds that allow the continuous issuance and redeeming of units. You can buy or sell units at the existing net asset value (NAV) on any business day.
How do Open-Ended Mutual Funds Work?
In open ended funds, a fund manager invests the corpus money in securities like stocks, bonds, and money market instruments. You can earn returns based on the increase in NAV or dividend distributions. There is no fixed maturity date for these funds.
What are the Benefits of Investing in Open Ended Mutual Funds?
Key benefits of investing in these funds include easy liquidity, flexibility, and diversification of existing portfolios.
What are the Risks Associated with Open Ended Mutual Funds?
Key risks for investors include market volatility, the fund’s expense ratio, and liquidity-related risks.
References:
https://www.motilaloswalmf.com/investor-education/blog/open-ended-mutual-funds/
https://www.investopedia.com/terms/o/open-endfund.asp
https://groww.in/p/open-ended-funds
https://www.5paisa.com/stock-market-guide/mutual-funds/open-ended-mutual-fund
