Open Ended Mutual Fund - Meaning, What It Is, Scheme, & Examples

All That You Need to Know About Open-Ended Mutual Fund

When investing in mutual funds, a big concern of most investors is how "liquid" or "locked-in" their money will be. Liquid funds (debt and money market funds) allow investors quick access to their funds. But with some limitations in terms of the types of companies they can hold, they can achieve a different goal than a long-term investor.

On the other hand, open-ended funds continuously offer shares to new investors and redeem shares from existing investors. Mutual funds can be created in several shapes and sizes to meet the needs of different investors. Open-ended mutual funds are one such product type.

What Is Open-Ended Mutual Fund?

Open-ended mutual funds are those funds that can issue or redeem units of the respective fund as and when the fund house decides to meet the demand and supply of units. The units of open-ended mutual funds are traded in the secondary market through stock exchanges. Open-ended funds are also known as 'Public Mutual Funds.

An open-ended mutual fund is a collective investment scheme that offers its units for sale to the public. The NAV of these schemes depends on the demand and supply of units. The price at which the fund sells its units is called the Net Asset Value (NAV).

The NAV of an open-ended mutual fund is calculated by dividing the total value of all the investments made by investors in a particular scheme by the total number of units issued by the plan. This is done daily, and investors are given a net asset value statement every month or quarter depending on when an investor purchases or redeems their units from the fund.

Investors can buy or sell units of open-ended mutual funds anytime during market hours through their broker or directly from the distributor/distributor bank. If an investor buys more than INR 100,000 units in one transaction, they will have to register themselves with SEBI as an MF distributor.

Types of Open-Ended Mutual Funds

Open-ended mutual funds are mutual funds that can be bought and sold throughout their life. They differ from closed-end funds (CEFs) because a fixed number of shares does not issue them.

There are two types of open-ended mutual funds:

• Units represent fractions of a fund's assets, like individual stock or bond shares. They trade on exchanges at prices that may be above or below the value of their underlying assets.
• Shares represent full ownership in a fund, but there is no trading market for them. Investors buy and sell through brokers at the net asset value (NAV) per share as determined by the fund's trustee or custodian.

There are two main kinds of open-ended mutual funds: no load and load. No load mutual funds don't charge sales charges (called loads), while load mutual funds charge sales charges.

Features of Open-Ended Mutual Funds

Open-ended mutual funds' main feature is that they can be purchased or sold anytime by investors. No matter when you buy into an open-ended fund, you can sell out anytime. They are also known as equity funds because they invest in equities that investors can buy and sell through stock exchanges like BSE and NSE.

The value of these shares may rise or fall depending on the performance of the company concerned. The return from open-ended mutual funds depends on whether there is any gain from selling units under the scheme. If there is no gain, then there will be no tax liability for capital gains arising from the sale of units under such schemes.

But if there is any gain, then it would be taxable as per your income tax slab rates for long-term gains (more than one year) or short-term gains (less than one year), depending on how long you have held them before selling them off in your portfolio. Open-ended mutual funds can issue or redeem the number of unit shares as and when required. They are also known as growth schemes or equity-oriented schemes.

They can sell the units to a person willing to buy them at a price called Net Asset Value (NAV). Investment in open-ended mutual funds requires no minimum amount compared to other types of mutual fund schemes. The investors can make a small investment every month, every quarter or even once a year, depending upon their requirements.

The investors can redeem their units before the maturity date and reinvest the amount at any point before the maturity date. There is no exit load for redeeming units before maturity. However, some administrative charges might be levied by the fund house if redeemed after three years from the purchase date.

Still, these charges are nominal compared to other aggressive schemes like equity-linked saving schemes (ELSS), where an exit load of 1% is redeemed within the first two years from the purchase date. 

What Is the Difference Between Open-Ended and Close-Ended Mutual Funds?

The main difference between open and closed-ended mutual funds is that the latter issue a fixed number of shares, while open-ended funds issue new shares when demand increases and redeem shares when demand decreases. Open-ended funds are more flexible than closed-end funds because they can adjust their portfolios based on investor demand rather than have all their assets in one investment type, such as stocks.

Open-ended mutual funds are mutual funds that issue shares to investors. These funds have no restriction on the number of shares that can be issued. As a result, there is no closing date and no limit on the total amount that can be raised. Closed-end mutual funds cannot issue more shares after the original offering period has ended.

The stock exchange where they trade may impose restrictions on how many shares they give over time, but they will only be able to issue what was sold during their initial public offering (IPO). Another significant difference between open-ended and close-ended mutual funds is that open-ended funds do not have a predetermined number of shares or a predetermined price per share.

Investors who buy into an open-ended fund can buy as many or as few shares as they want at any time - there is no minimum purchase requirement like there is with closed-end funds. While closed-end funds are somewhat limited in raising capital (they must sell their entire portfolio before issuing new shares), open-ended mutual funds have no limitations.

Benefits of Open-Ended Mutual Funds

There are several benefits associated with open-ended mutual funds, including:

• Lower Investment minimums – Most open-ended mutual funds have lower investment minimums than other funds.
• Flexibility – As an investor, you can redeem your shares whenever possible without incurring fees or penalties. In addition, if there's an increase in inflation, you can sell your holdings at any time without worrying about whether those shares will be worth less. This gives you greater flexibility over your investments than other mutual funds like closed-end funds or ETFs (exchange-traded funds).
• Diversification – Open-ended mutual funds allow for greater diversification because they can be invested in many different stocks and bonds simultaneously instead of just one or two companies like closed-end mutual funds.
• More liquidity- With an open-ended mutual fund, investors can buy or sell their shares at any time during market hours on a stock exchange. This offers greater liquidity than closed-end funds in which redemption is not allowed by the fund manager, and most of these funds trade at a discount to NAV (Net Asset Value).
• Better control over portfolio management- Since there is no fixed portfolio size for open-ended mutual funds, they have better flexibility over their portfolios than closed-end funds. They can increase or decrease the number of stocks they hold based on their investment strategy without waiting for an offering period to end before they can acquire more shares or sell existing ones to finance the buyback activity.

Conclusion

Open-ended mutual funds is an entities through which the MF company offers numerous schemes classified under different categories and investment objectives. Investors have a wide range of options to suit their personal needs. Since there are various schemes, the investor can invest in the scheme according to their time frame and goals.

Frequently Asked Questions (FAQs)

What is the Net Asset Value of a mutual fund?

A mutual fund's Net Asset Value (NAV) is the total value of all the stocks, bonds, and cash the fund owns. It's calculated by adding the individual securities' prices and then dividing by the number of shares outstanding in the fund.

What is the operating expense ratio for a mutual fund?

The operating expense ratio is a percentage of assets the fund manager charges to cover operating costs such as salaries, marketing expenses and legal fees. This percentage is disclosed in the prospectus for each fund and varies from one fund to another depending on how much management charge it takes to run your investment account.

What is the exit load of a mutual fund?

The Exit Load is the percentage of the investment amount that an investor has to pay in case of premature withdrawal. In other words, it is the penalty for withdrawing their investment before the lock-in period is over.