Mutual Funds are classified into two funds:
- Open-Ended Fund
- Close- Ended Fund
What is Open-Ended Fund?
Open-Ended Fund schemes are available for subscription and repurchase regularly. It allows investors to enter and exit as per their convenience.
In the case of new funds, the units can be dealing with even after the initial offering period.
There is no fixed maturity period in Open-Ended Funds schemes. Hedge funds, some mutual funds, and exchange-traded funds (ETFs) are types of open-end funds.
In other words, an open-end fund is a type of investment vehicle that uses pooled assets, which allows for ongoing new contributions and withdrawals from investors of the pool.
These types of investment (Open-ended funds) are suitable for those investors who wish to invest in a liquid investment instrument and are willing to undertake market risk and cash flow risk for high returns.
How an Open-Ended Fund Mutual Funds Works?
A mutual fund is glided in the market through a New Fund Offer (NFO). In the case of open-ended funds, an investor can deal in units of an open-ended mutual fund at any time after the closure of NFO, which is open for a maximum 30 day
Investment in these funds can be made via systematic investment plans (SIPs) and systematic withdrawal plans (SWPs).
In the open-ended mutual funds, dealing in units on-demand at the Net Asset Value (NAV) of the fund. The NAV varies daily based on the prices of the stocks and bonds in the market.
Once an investor redeems the units of an open-ended fund, the units are taken off the market. The fund is professionally managed by the fund manager or fund houses.
- Liquidity: Open-ended funds offer high liquidity and it allow investors to redeem the fund units at any time they want. The fund units are redeemed at the fund’s net asset value on the day of units are redeemed.
- Availability of track record: The performance track record of an open-ended fund spanning across different market cycles is available. This helps investors to make an appropriate decision and invest according to their plan.
- Systematic Investment Plan: open-ended funds are a suitable investment option for a large number of salaried class of investors. It is because they can invest via SIP. Open-ended funds allow investors to make use of systematic plans for investment and withdrawal purposes.
- Diversified portfolios: Open-ended funds invest a variety of assets. The stocks related to a range of industries and companies. A diversified portfolio helps the investor to reduce the risks associated with investments.
Disadvantages of Investing in Open-Ended Funds
- Market Risk: The fund manager of open-ended funds maintains a highly diversified portfolio, and they are subject to market risk. The NAV of an open-ended fund fluctuates daily owing to stock market volatility. Thus, one must cautiously invest in open-ended funds.
- No Say in Asset Composition: Open-ended funds appoint well-qualified fund managers with good experience in the field of fund management. They take all the decisions related to the selection of securities for the fund. And the investors don’t have a say in deciding the asset composition of the fund.
- Exit loads: Open-ended funds also have exit loads. These are charges levied upon investors if investors exit the fund within certain maintained periods, typically up to 1 year. Thus, the ultimate earnings from an open-ended fund get reduced if it attracts capital gain tax.