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.
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.
Here is a quick look at some advantages of open ended mutual funds-
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.
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.
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.
Here is a quick look at some disadvantages of open ended mutual funds-
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.
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.
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.
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.
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.
Ensure that you read the offer document carefully and check the asset allocation that the scheme plans to follow to understand the tax rates.
Related Mutual Fund Pages