Among the various mutual fund types based on their organisation structure, open-ended funds are the most common and favoured among investors. In fact, in June 2023, open-ended mutual funds witnessed a significant increase of 167% and reached ₹8,637 Crores. 

 

One reason for the popularity of these funds is that there are unlimited shares, giving better flexibility and ease of investing. Read on for answers to the question, “What is an open-ended mutual fund?”, and learn more about its pros and cons. 

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.

Advantages of Open-Ended Funds

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

  • Benefit from SIP, SWP and STP

Systematic Investment Plan (SIP) is generally available in these funds, and this allows 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 salaried individuals and those without an immediate corpus to invest. On the other hand, STP or systematic transfer plan lets you transfer money from one scheme to another. 

 

When you need to withdraw your money, you can opt for the SWP or Systematic Withdrawal Plan. Choose any 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 the maximum liquidity as compared to other investment options that come with fixed lock-in periods.

  • Assess Performance Across Market Cycles

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

 

By accessing this information, you can 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.

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Disadvantages of Open-Ended Funds

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

1. 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. Although fund managers diversify their investments to adjust for this volatility, these funds inherently carry certain risks.

2. Impact of Bigger Inflows and Outflows

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

3. Higher Expense Ratios

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

Example of Open-Ended Funds

Fidelity's Magellan Fund is a real-life open-ended fund example, which is one of the company's earliest funds, established in 1963. It had the primary objective of capital appreciation and gained popularity between the 1970s and 1980s for its consistent outperformance in the stock market.

 

By June 2021, it achieved a lifetime return of 16.14%, largely attributed to the portfolio manager of this fund, Mr Peter Lynch. The fund had reached assets of 100 billion USD, leading Fidelity to close it to new investors for almost a decade starting in 1997. It eventually reopened in the year 2008.

 

Now that you know more about this instrument, choose a fund option based on your preferences and expectations of returns. Open-ended mutual funds are an ideal choice if you seek liquidity, have no time restrictions, and can take risks to get attractive returns. 

 

Once you finalise your investment fund, you can visit Bajaj Markets and begin investing in minutes. You can choose from some of the top funds across categories and take the necessary step to grow your wealth. 

 

FAQs on Open-Ended Funds

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.

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.

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.

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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