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Mutual funds are available in different structures based on how investors can enter and exit a scheme. Open ended mutual funds are one of the commonly used mutual fund structures that allow investors to purchase and redeem units based on the scheme’s Net Asset Value (NAV). These funds do not have a fixed maturity period and remain available for investment after their launch. Understanding how open ended mutual funds work, their features, types, benefits, risks, and taxation can help investors understand this investment structure more clearly.
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What Is Open Ended Mutual Fund?
An open ended mutual fund scheme is one where an investor can invest or redeem their units on the prevailing net asset value (NAV) on business days. This type of mutual fund scheme does not have any maturity date, and hence an investor remains invested till his investment objective is met.
Unlike closed ended mutual funds, open ended funds do not have a fixed number of units available throughout their investment period. The mutual fund company issues and redeems units based on investor transactions.
How Do Open Ended Mutual Funds Work?
The following steps explain how open ended mutual funds operate:
Step 1: Launch Of The Scheme
An open ended mutual fund is introduced through a New Fund Offer (NFO). During this period, investors can subscribe to units of the scheme.
Step 2: Investment In The Scheme
After the scheme becomes operational, investors can purchase units at the applicable NAV. The collected money is invested in securities according to the scheme’s investment objective.
Step 3: Portfolio Management
The fund manager manages the portfolio by selecting and monitoring investments based on the scheme’s stated strategy. The portfolio value changes according to the performance of the underlying securities.
Step 4: Purchase And Redemption Of Units
Investors can buy additional units or redeem existing units at the applicable NAV on business days. The redemption amount is based on the number of units held and the NAV at the time of redemption.
Features of Open Ended Mutual Funds
The following are some key features of open ended mutual funds:
- No Fixed Maturity Period: Open ended mutual funds generally do not have a fixed maturity date. Investors can remain invested according to their investment requirements.
- Continuous Purchase And Redemption: Investors can purchase or redeem units based on the applicable NAV on business days.
- Professional Management: Fund managers manage the portfolio based on the scheme’s investment objective.
- Diversified Portfolio: These funds generally invest across multiple securities based on the scheme category and objective.
Types of Open Ended Mutual Funds
Open ended mutual funds are available across different categories based on their investment objectives and underlying assets. The following are some common types:
- Equity Funds: Equity funds invest primarily in shares of companies. The portfolio may include companies from different sectors and market capitalisations. The performance of these funds may be influenced by stock market movements and economic conditions.
- Debt Funds: Debt funds invest in fixed income securities such as government securities, corporate bonds, and other debt instruments. Their performance may depend on factors such as interest rates, credit quality, and market conditions.
- Hybrid Funds: Hybrid funds invest in a combination of equity and debt instruments. The allocation between asset classes depends on the investment objective of the scheme.
- Liquid Funds: Liquid funds invest in short-term money market instruments and debt securities with shorter maturity periods. These funds are generally designed for short-duration investment needs.
- Equity Linked Savings Scheme: Equity Linked Savings Scheme (ELSS) funds invest primarily in equity-related securities and qualify for tax benefits under Section 80C of the Income Tax Act, subject to applicable conditions. These funds have a specified lock-in period.
Benefits of Open Ended Mutual Funds
The following are some benefits of open ended mutual funds:
- Flexibility In Investment And Redemption: Open ended mutual funds allow investors to purchase and redeem units at applicable NAVs on business days. This provides flexibility compared to funds with fixed maturity periods.
- Multiple Investment Options: Investors can choose different categories of open ended mutual funds based on the scheme objective, asset allocation, and investment approach.
- Professional Fund Management: These funds are managed by professional fund managers who monitor investments and manage the portfolio according to the scheme guidelines.
- Portfolio Diversification: Open ended mutual funds invest across multiple securities based on their category. This provides exposure to a collection of investments through a single scheme.
- SIP Facility: Many open ended mutual funds allow investors to invest through SIPs. SIPs involve investing a fixed amount at regular intervals, subject to scheme provisions.
Disadvantages of Investing In Open Ended Mutual Funds
The following are some risks associated with open ended mutual funds:
- Market Risk: The value of mutual fund units may fluctuate due to changes in market conditions and the performance of underlying securities.
- Interest Rate Risk: Debt-oriented funds may be affected by changes in interest rates.
- Credit Risk: Debt funds may face risks related to the repayment ability of issuers of debt securities.
- Liquidity Risk: Certain underlying securities may have limited market liquidity, which can affect transactions.
- No Fixed Returns: Returns from mutual funds depend on market performance and are not fixed.
Open Ended Vs Closed Ended Mutual Funds
The following table highlights the differences between open ended and closed ended mutual funds:
| Basis |
Open Ended Mutual Funds |
Closed Ended Mutual Funds |
| Investment period |
No fixed maturity period |
Fixed maturity period |
| Purchase and redemption |
Units can generally be purchased or redeemed on business days |
Units are generally available during the New Fund Offer period |
| Liquidity |
Transactions are based on applicable NAV |
Liquidity may depend on exchange trading after listing |
| Number of units |
Units may increase or decrease based on purchases and redemptions |
Number of units remains fixed after the fund launch |
| Pricing |
Transactions take place at applicable NAV |
Market price may differ from NAV after listing |
Taxation of Open Ended Mutual Funds In India
The taxation of open ended mutual funds depends on the type of mutual fund scheme and the holding period. Different tax rules apply to equity-oriented funds and other mutual fund categories.
The following table explains the general taxation structure:
| Type Of Fund |
Holding Period |
Tax Treatment |
| Equity-oriented mutual funds |
Up to 12 months |
Short-term capital gains (STCG) are taxed at 20% |
| Equity-oriented mutual funds |
More than 12 months |
Long-term capital gains (LTCG) above the applicable exemption limit are taxed at 12.5% |
| Other mutual funds |
Up to 24 months |
Short-term capital gains are taxed according to applicable income tax slab rates |
| Other mutual funds |
More than 24 months |
Long-term capital gains are generally taxed at 12.5% without indexation benefit |
Tax rules may change based on government regulations. Investors may refer to applicable tax provisions or consult a tax adviser for specific tax-related information.
How to Invest in Open Ended Mutual Funds
The following steps explain the general process of investing in open ended mutual funds:
Step 1: Select A Mutual Fund Scheme
Investors may review different mutual fund categories and understand the scheme objective, investment approach, portfolio details, and associated risks.
Step 2: Complete The Investment Process
Investors need to complete the required documentation process, including Know Your Customer (KYC) requirements, before investing.
Step 3: Choose Investment Method
Investors can select investment options such as lump sum investment or SIP, depending on the available options under the selected scheme.
Step 4: Purchase Mutual Fund Units
After completing the investment process, units are allocated based on the applicable NAV and investment amount.
Step 5: Monitor Investment Details
Investors can review account statements, portfolio information, and scheme updates to track their investments.
Who Should Invest in Open Ended Mutual Funds?
The following are some categories of investors who may consider understanding open ended mutual funds:
- Investors Looking For Flexible Investment Options: Open ended funds provide the option to purchase or redeem units based on applicable NAVs.
- Investors Exploring Different Fund Categories: These funds are available across equity, debt, hybrid, and other categories.
- Investors Using SIPs: Many open ended funds provide SIP facilities for regular investments.
- Investors Seeking Portfolio Diversification: These funds provide exposure to multiple securities through a single mutual fund scheme.
Investors may review the scheme objective, risk factors, and investment details before selecting a mutual fund scheme.
Conclusion
Open ended mutual funds are investment schemes that allow investors to purchase and redeem units based on the applicable NAV. These funds are available across different categories, including equity, debt, hybrid, liquid, and ELSS funds. While they provide flexibility and access to professionally managed portfolios, they are also subject to market-related risks. Understanding the features, taxation rules, investment process, and associated risks can help investors evaluate open ended mutual funds as part of their investment planning process.
