What are Open Ended Mutual Funds?

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  • 28 Dec 2023
What is Open Ended Mutual Funds?

Key Highlights

  • An open-ended mutual fund is a fund scheme that can be invested and redempted anytime.
  • This fund offers investors a cost-effective and seamless way of pooling funds.
  • Investors can buy a diversified portfolio that reflects an investment objective.
  • Small or large organisations can achieve their objectives by investing in income and growth.

A type of mutual fund is an Open-ended fund. It's a way of pooling the money of many investors who share the same goals. The fund house invests in this pool of funds. The number of shares a fund house can issue is not restricted here. At the end of each business day, a net asset value will be calculated for these funds. Based on that price, buyers and sellers will be able to trade. The more commonly used category of mutual funds is open-ended funds.

Such funds are an easy way to invest. Open-ended mutual funds with minimal amounts are a good way to start investing. Today, investors do not need stockbrokers to put their money into open-ended schemes. The NAV is regarded as a benchmark of the fund's performance. However, having access to professional expertise is always an added advantage. Open-ended mutual funds are called open as both the investment time and the number of investors allowed to participate remain open.

Investors can redeem or purchase units within this fund at the current NAV or Net Asset Value on any working day of the week. The NAV will be calculated from the performance of the Fund's underlying securities. The meaning of an open-ended mutual fund is, in simple words, that these mutual funds are traded through the NFO. Considering the open-ended mutual funds, investors may sell or purchase units after the NFO period ends.

There are no limits to the number of units that can be assigned. Another feature is that this fund does not have a maturity period. To sell units of the scheme, however, investors may require payment of an exit fee.

Follow the below points to evaluate open-ended funds.

  • According to open-ended funds, they may invest in such mutual funds either during or after the NFO period.
  • Investors must allocate units according to face value or par value when investing in the NFO period.
  • However, investors are assigned shares according to prevailing net asset value when they wish to invest after the expiry of the NFO subscription period.

The benefits of open-ended funds are as follows.

1. Investing in open-ended mutual funds is an affordable investment option. With very little money, you can begin to invest. An alternative option is to start with a systematic investment plan that enables you to make a manageable monthly payment.

2. Expert assistance can be relied upon. A professional fund manager will assist you and advise you on the funds to invest in. Professional experience can be relied upon. You don't have to do your research and trade in less-than-optimal circumstances.

3. You are going to have the benefit of flexibility. If you have invested in mutual funds, which the same family runs, but if your investment objective has changed, it may be possible to change those funds. The cost of switching is less. Moreover, it allows you to filter out the funds that do not meet your expectations.

4. It is easy to liquidate an open-ended mutual fund. You can sell open-end funds on the market at any time at the right price. There are also plans to withdraw systematically in respect of some funds. These plans allow you to start your funds regularly and smoothly for defined periods.

5. Over the long term, open-ended funds give you a higher return. These funds are usually better placed to achieve higher returns on equity as an asset category. The volatility of the equity markets can be managed with reasonable risk if you stay invested for a more extended period.

The drawbacks of open-ended mutual funds are as follows.

  1. The net asset value in this scheme fluctuates, so open-ended funds can sometimes be risky.
  2. As these funds already employ experienced managers for decision-making, investors need the opportunity to express their views.

How do you Invest in Open-Ended Mutual Funds?

Investing in open-ended mutual funds offers various methods, including lump sum, SIP, STP, or SWP. Follow the steps below to invest in open-ended mutual funds.

  1. You can open a Mutual Fund account with an Asset Management Company.
  2. Check that you have completed your Know Your Customer(KYC) formalities.
  3. Identify the investment fund you wish to participate in, considering your financial objectives, risk tolerance, and investment horizon.
  4. Select a particular open-ended fund that will correspond with your needs and choose the investment method you wish to use: a lump sum, SIP, or any other type of investable fund.
  5. You can also set up standing instructions with your bank for automatic investments using the SIP method.

Conclusion

Open-ended mutual funds offer a dynamic and professionally managed investment approach. They attract a broad range of investors for their liquidity, diversification, tax advantages, and accessibility. When making funding decisions, it is essential to understand the underlying risks and conduct in-depth research. Open-ended mutual funds can be essential to your investment portfolio, contributing to achieving financial objectives and securing a sound financial future. Investors can adequately plan, guided by expert advice, and disciplined investing.

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