Among the various mutual fund types based on their organisation structure, open-ended funds are the most common and favoured among investors. One reason for the popularity of open-ended funds is that there are unlimited shares, giving better flexibility and ease of investing.

What are Open-Ended Funds?

The open-ended scheme works similar to other mutual fund schemes. The difference, however, is that there are unlimited shares involved. Moreover, the fund sponsor has the authority and flexibility to redeem and sell shares directly to investors. 


The pricing of open-ended shares fluctuates daily, and the trading happens based on their current Net Asset Value (NAV). Common examples include mutual funds, Exchange-traded Funds (ETFs) and hedge funds.

How do Open-Ended Funds Work?

As the name suggests, open-ended funds allow you to purchase or redeem units on any working day. Shares are bought and sold on demand at their NAV, and the underlying securities’ performance determines the NAV.

 

Open-ended mutual funds are floated through NFO. You can sell or buy the units once the NFO period concludes. There are no limitations on the units’ number that can be issued. Also, they do not have a maturity period. However, an exit load is applicable if you wish to sell your units.

 

An open-end fund is an easy, low-cost investment that allows you to pool your money and invest in a diversified portfolio aligning with your investment objectives. Additionally, you can start your investment with a smaller amount, making this option accessible at all levels.

Pros of Open-Ended Funds

Some of the top benefits you can enjoy with open-ended funds are:

  • Benefit from SIP, SWP and STP

You can generally invest via Systematic Investment Plans (SIPs) in these funds, allowing you to invest a fixed amount every month. As such, it becomes an affordable way of starting investments and securing financial growth. 

 

It is especially advantageous for individuals who don’t have a substantial amount of money to invest. On the other hand, an STP or systematic transfer plan lets you transfer money from one scheme to another. 

 

You can also opt for an SWP or Systematic Withdrawal Plan if you wish to withdraw your funds. Choose the mode that best suits your requirements and enjoy the benefits of open-ended funds.

  • Enjoy High Liquidity

You have the flexibility to redeem units of open-ended funds on any working day, depending on the fund you choose. As such, these funds offer great liquidity as compared to other investment options that come with fixed lock-in periods.

  • Assess Performance Across Market Cycles

There are various open-ended funds that were established years ago and have withstood various market cycles. The AMC makes the fund’s performance through these cycles available on their website.

 

Accessing this information can help you assess the performance of the fund in the near future and in the long run. As such, you can ensure that it aligns with your goals and make informed decisions.

 

The NAV of these funds get calculated on a daily basis at the end of each day. This way, you can track its current and immediate past performance without any additional tools. Based on this information, you can make informed investment decisions.

Cons of Open-Ended Funds

Here are a few disadvantages associated with open-ended funds that you must know. 

  • Exposure to Market and Cash Flow Risks

Open-ended funds are those types of mutual funds that are exposed to both market risks as well as cash flow risks. The NAV of these funds’ changes daily in response to the movement in the market. This adds to the volatility and potential risks associated with open-ended funds.

  • Impact of Bigger Inflows and Outflows

Unlike closed-ended funds, open-ended mutual fund schemes are prone to significant inflows as well as outflows in the form of withdrawals. Rapid outflows could lead to a fund manager selling units at unfavourable prices, which can potentially result in losses. 

  • Higher Expense Ratios

These funds may incur higher expense ratios as compared to alternative investment options, leading to diminished returns on investment.

Types of Investments in Open-Ended Funds

Open-ended funds are classified into various categories on the basis of their structure, asset class and speciality. Here are some types:

  • Equity Funds

Equity funds are commonly known as stock funds since they primarily invest in stocks. These types of funds invest money from various investors into shares or stocks of different companies.

 

 

The returns with these funds depend on how the stock market performs. Equity funds are riskier, and therefore, ideal for investors with a larger risk appetite.

  • Debt Funds

Debt funds invest a large share in fixed-income securities, like bonds, treasury bills, etc. These investments have a fixed interest rate and maturity date. 

 

Hence, a debt fund is an ideal investment option for risk-averse investors seeking a regular income with minimal risks.

  • Growth Funds

Growth funds are mutual funds that primarily allocate the funds in shares and growth sectors. This investment option is suitable for investors with idle money. These funds offer the possibility of higher returns, but they do have a higher degree of risk.

  • Liquid Funds

Liquid funds are funds that invest in the money market and debt instruments. They have a tenor of up to 91 days, providing higher liquidity, as the name suggests. 

 

The Net Asset Value (NAV) of liquid funds is calculated for 365 days, while only business days are considered for other types of funds.

  •  Equity-Linked Saving Scheme

An equity-linked savings scheme (ELSS) generates returns from the equity-linked markets. ELSS plans offer tax benefits as well as provide returns to grow your wealth. 

 

Under Section 80C of the Income Tax Act, you could get tax benefits up to ₹1.5 Lakhs with ELSS. However, there is a lock-in period of three years.

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Who Should Invest in an Open-Ended Mutual Fund?

While assessing an investment, start by clearly stating your investment goals, risk tolerance, preferences and investment horizon. If you are a beginner, choosing open-ended funds could be a smart decision.

 

This is because they have a straightforward process, and professional fund managers allocate the assets and manage your fund. Also, you do not need a lump sum to begin your investment, as you can start investing with a small initial amount.

 

To generate regular income, you can choose open-ended funds with dividend options to get periodic payouts. These periodic payouts provide you with a regular and predictable income, helping you meet your financial needs.

Taxation on Open-Ended Funds

The tax that you need to pay depends on whether the mutual fund has a larger portion of investment in debt or equity instruments. If the open-ended fund allocates 65% or more of its total assets in debt instruments, then it is considered a debt fund. 

 

On the other hand, if the open-ended fund invests a minimum of 65% of its total assets in equity investments, it is categorised as an equity fund. 

 

So, you need to understand the fund’s asset allocation carefully since it determines the tax implication on your investment.

FAQs on Open-Ended Funds

How does an open-ended fund work?

Open-ended funds are a diverse collection of pooled investor funds that can issue an unlimited number of shares. The fund sponsor can directly redeem or sell shares to investors. The shares are priced daily based on the current net asset value or NAV.

What is the difference between an open-ended and a close-ended fund?

The difference between open-ended and close-ended funds is that you can buy and sell open-ended funds at any time. On the other hand, you can only purchase close-ended funds during the introduction, and you can only redeem them when their term expires.

Are open-ended funds suitable for new investors?

Yes, for new investors, open-ended funds can be a fitting choice due to its numerous advantages. However, you must assess your risk tolerance, time horizon, and investment objectives before finalising a fund.

Is it possible to switch between different open-ended funds?

Yes, you can switch between various open-ended funds in India. It is essential to be aware of the potential exit load that comes with it. Exit load is the fee that the fund companies levy for selling units of the fund within a specified time period after purchase.

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