Open Ended Mutual Fund: Meaning, Features & How To Invest

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:

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:

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.