Open-ended mutual funds are schemes where units can be purchased and sold at any time without lock-in or fixed tenure. Read this post to understand open-ended schemes in detail.

One of the most significant USPs of mutual funds is their flexibility. Investors can enter and exit the scheme based on their requirements. However, this flexibility is only available in open-ended mutual funds. The other category, close-ended schemes, does not allow investors to enter and exit at their will.

So, what are these open-ended schemes? How are they different from close-ended schemes? Let’s take a look-

What is Open Ended Mutual Fund?

An open-ended mutual fund scheme does not have a maturity or lock-in period, which means investors can stay invested for as long as they want. Investors can buy or sell open-ended mutual fund scheme units at any anytime on any working day without any restrictions.

How Do Open-Ended Funds Work?

Let's take a look at its working to understand open-ended mutual fund meaning better-

• A new open-ended scheme is launched through an NFO (New Fund Offer)

• Once the NFO period is over, investors can enter and exit the scheme at any time

• As open-ended schemes always remain open for investments, they can issue an unlimited number of scheme units

• Investors can make a lump sum investment or start a SIP (Systematic Investment Plan) in the scheme of their choice

• Entries and exits are made on the NAV, which fluctuates daily based on the fluctuations in the scheme’s portfolio

• Once investors redeem the units of their open-ended scheme, the redeemed units are taken off the market

• However, some schemes do have an exit load for investors and it varies from time to time.
  
  Also Read - Exit Load in Mutual Fund: Meaning, Types, and Calculation

What are the Advantages of Open-Ended Funds?

Some of the key benefits of open-ended schemes are as follows-

 Highly Liquid

Investors can redeem their units held in an open-ended mutual fund scheme on any working day, which provides additional liquidity to their investment portfolios. There are several other investment options that may offer good returns; however, several may have a lock-in period that makes it difficult to exit the investment before maturity. Open-ended mutual funds offer maximum liquidity.

 Availability of SIP

Since investors can buy open-ended mutual fund schemes on any working day, they can avail of a systematic investment plan (SIP) to regularly invest a fixed amount. This is beneficial for salaried individuals and investors who do not have a lumpsum investible corpus. Additionally, a SIP is beneficial to accumulate wealth over the long-term without requiring a huge capital investment.

 Informed Decision-Making

Investment and redemption in an open-ended mutual fund scheme can be done at any point in time. Therefore, investors can analyze the historical performance of the scheme to understand how it has performed under varying market conditions. This allows investors to make an informed decision based on their personal requirements.

 Professional Management

Like other schemes, open-ended funds also have fund managers to make investment decisions on behalf of the investors.

What are the Disadvantages of Open-Ended Funds?

Just like the advantages, investors should also consider the disadvantages before investing. Here are some disadvantages of an open-ended scheme of mutual fund-

 Market Risks

Investors can invest either online or offline directly with the Open-ended mutual fund schemes are subject to cash flow and market risks. The Net Asset Value (NAV) of these schemes varies everyday based on the market conditions and volatility.

 Higher Inflow and Outflow

As these schemes allow investors to buy and sell the units at any time, the inflows and outflows are significantly higher than close-ended funds. This requires fund managers to maintain a higher cash reserve for redemptions.

Click here to check - When to Sell Mutual Funds?

 Highly Volatility

The NAV of open-ended mutual fund schemes varies based on the performance of the underlying assets. Therefore, such schemes are subject to market risks and can be highly volatile. Often, the fund managers endeavor to reduce such volatility through diversification. Nonetheless, open-ended mutual fund schemes have a certain level of inherent market risks.

Who Should Invest in Open-Ended Funds?

As open-ended schemes are available across equity and debt categories, investors should consider investing in them based on their objectives. Some of the aspects you should take into consideration are-

• Liquidity expectations

• Risk appetite

• Investment amount and horizon

• Returns expectations

In most cases, open-ended mutual funds are ideal for investors who want higher liquidity with no restriction on when they’re allowed to redeem their investments.

Tax Benefits of Open-Ended Funds

The taxation of open-ended mutual funds varies based on whether these are equity-oriented or debt-oriented schemes.

*LTCG on equity schemes are tax exempted for an amount of up to INR 1 lakh

Open-ended schemes like ELSS funds also offer tax benefits. Investors are eligible for a tax deduction for an investment of up to INR 1.5 lakh per year. This means if an investor falls in the highest tax bracket, they can save up to INR 46,800 per annum in taxes.

How are Open-Ended Funds Different from Close-Ended Funds?

Now that you know what open-ended fund means, here’s how these funds are different from close-ended schemes-

How to Invest in an Open-Ended Fund?

Investors can visit the official website of the AMC, offering their preferred open-ended scheme to start investing. For offline investments, look for an AMFI (Association of Mutual Funds) registered mutual fund distributor with a valid ARN (AMFI Registration Number).

However, it is worth noting that people can invest in direct plans when the investment is made through the AMC website. With agents, you invest in regular plans as agent commission is involved. So, the returns from a regular plan are generally lower than direct plans.

But the distributor/agent route can be ideal for investors who need the expertise of a professional with fund selection and investing.

How to Redeem Open-Ended Mutual Fund?

Investors can redeem the units held in an open-ended mutual fund at any point in time at the prevailing NAV. However, there may be an additional charge if the investors redeem the units before the end of the exit load period. It is recommended that investors review the Scheme Information Document (SID) to understand the implications of exit load before investing in a particular scheme.

Equity-linked saving schemes (ELSS) have a minimum lock-in period of three years for investors who claim the income tax deduction. Investors cannot redeem the ELSS units during the lock-in period. At the end of three years, they may redeem their investments like other open-ended mutual fund schemes.

Achieving Investment Objectives Through Open-Ended Mutual Funds

Open-ended schemes are ideal for investors for whom liquidity is a significant concern. With complete freedom to enter and exit the same as required, these schemes can help you with your short-term and long-term investment objectives.

However, before investing in an open-ended scheme, thoroughly check its past performance and offer documents to ensure it aligns with your objective and risk appetite.

Also read our blog: Open Ended vs Close End Mutual Funds. Which suits you best?

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.