Open Ended Mutual Funds: Meaning, Types & Investor Fit

Open ended mutual funds are professionally managed investment schemes that let you purchase or redeem units on any business day based on the prevailing net asset value (NAV). These funds offer investors the flexibility to enter or exit at their convenience, making them suitable for a wide range of financial goals. With diversified portfolios and transparent operations, open ended mutual funds are suitable for those seeking long term wealth creation along with regular liquidity.

Key Takeaways

• Open ended mutual funds allow investors to buy or sell units on any business day as per the applicable Net Asset Value (NAV).
• These funds are well suited for individuals who prefer flexible entry and exit based on their financial needs.
• The investments are managed by experienced fund managers who allocate money across equity, debt, or hybrid instruments, depending on the fund’s objective.
• Investors can start with a lumpsum amount or choose a Systematic Investment Plan (SIP) to invest regularly over time.

What are Open Ended Mutual Funds?

Open ended mutual funds are investment schemes that remain open for purchase and redemption throughout the year. They do not have a fixed maturity period, allowing investors to enter or exit the fund at any time, depending on their financial goals or liquidity needs.

These funds continuously issue new units to investors and redeem existing ones based on the current Net Asset Value (NAV), which is declared at the end of each business day. This structure offers ease of access and flexibility, making them suitable for both new and experienced investors.

Unlike closed ended mutual funds which are available for investment only during the New Fund Offer (NFO) period and are later traded on stock exchanges open ended funds are transacted directly with the fund house at the prevailing NAV.

How an Open End Fund Works?

In an open ended mutual fund, the Asset Management Company (AMC) collects money from multiple investors and invests it in accordance with the fund’s stated investment objective typically across asset classes such as equity, debt, or a mix of both. Investors can buy or redeem units at the fund’s Net Asset Value (NAV), which is calculated at the end of each business day based on the market value of the underlying portfolio.

Since investors can enter or exit the fund at any time, the total corpus of the fund keeps changing. This dynamic nature allows the fund to continuously issue new units or redeem existing ones. Transactions in open ended funds are executed on business days, and settlements usually occur within one or two working days (T+1 or T+2), depending on the type of scheme.

Advantages of Open Ended Mutual Funds

• Liquidity: Investors can buy or redeem units on any business day, offering easy access to funds when needed.
• Goal Based Flexibility: These funds can support both short term and long term financial objectives, depending on the investor’s planning horizon.
• Portfolio Transparency: Mutual fund houses disclose the Net Asset Value (NAV) daily and provide regular portfolio updates, helping investors track performance.
• Diversified Investments: Open ended funds typically invest across different sectors, asset classes, or securities, which helps manage risk through diversification.
• Option for Systematic Investment: Investors can start with small amounts through Systematic Investment Plans (SIPs), making it easier to build wealth over time with discipline.

For those beginning their Mutual Fund Investment journey, these benefits provide a structured approach to wealth creation.

How to Invest in Open Ended Funds?

Investing in open ended mutual funds is a straightforward process and can be done entirely online through platforms like Kotak Mutual Fund. Here’s how you can get started:

1. Complete Your KYC: Ensure your Know Your Customer (KYC) formalities are completed.
2. Select a Suitable Scheme: Choose a mutual fund scheme that aligns with your risk appetite, investment horizon, and financial goals.
3. Pick an Investment Mode: Decide whether you want to invest a lump sum amount or opt for a Systematic Investment Plan (SIP) for regular contributions.
4. Make the Payment: Once you finalise the scheme and amount, proceed with the payment. The fund house will allot units based on the applicable Net Asset Value (NAV) on the day of transaction.

Who Should Consider an Open Ended Fund?

Open ended mutual funds are suitable for a wide range of investors due to their flexibility and accessibility. They may be a good fit for:

• Investors who want professionally managed portfolios without the need for active decision making.
• Long term investors looking to grow their wealth steadily over time through equity, debt, or hybrid fund options.
• Individuals seeking liquidity, as these funds allow easy redemption when financial needs arise.
• Investors looking for diversification, as open ended funds spread investments across multiple securities, reducing the risk associated with individual assets.

Tax on Open Ended Mutual Funds

The tax treatment of open ended mutual funds depends on two key factors - the type of fund (equity oriented or debt oriented) and the duration for which the investment is held. Equity and debt funds are taxed differently, and the holding period determines whether gains are considered short term or long term.

Short term gains are typically taxed at a higher rate, while long term gains may offer certain tax benefits.

As mutual fund taxation is subject to periodic changes through government and regulatory updates, investors are advised to refer to the latest Kotak Mutual Fund Tax Reckoner for detailed and up to date information.

Drawbacks and Risks

Although open ended mutual funds offer flexibility, diversification, and professional fund management, investors should also consider the following potential risks and limitations:

• Market Linked Volatility: The performance of open ended funds is directly influenced by movements in the market. If the underlying securities such as stocks or bonds decline in value, the Net Asset Value (NAV) of the fund may also fall, affecting your returns.
• Exit Load and Holding Periods: Some schemes impose an exit load if you redeem your units within a certain period after investment. This is meant to encourage long term investing but can reduce your net returns if you need to withdraw early.
• Over Diversification Risk: While diversification helps in risk management, excessive diversification across too many asset classes or sectors may dilute the impact of high performing investments, potentially lowering overall returns.
• Behavioural Biases: Investors may react emotionally to short term market volatility. Exiting investments prematurely during market corrections can disrupt long term compounding and financial planning.
• Lack of Capital Guarantee: Mutual funds are subject to market risks, and there is no assurance of guaranteed returns or protection of capital. Even professionally managed funds carry inherent risks tied to the performance of the markets.

Understanding these factors can help investors align their expectations and choose schemes that match their investment horizon and risk tolerance. It’s advisable to consult a financial advisor before making investment decisions.

Should You Invest in Open Ended or Close Ended Funds?

The choice between open ended and close ended mutual funds depends on your investment objectives, liquidity needs, and risk profile.

Open ended funds offer the flexibility to invest or redeem at any time, making them more suitable for investors who prefer access to their money and are focused on long term financial goals. These funds are Suitable for those seeking disciplined investing through SIPs or regular portfolio adjustments.

On the other hand, close ended funds have a fixed maturity period and limited entry points, which may appeal to experienced investors comfortable with locking in their money for a set duration. They are generally listed on stock exchanges but may have lower liquidity in secondary markets.

Conclusion

Open ended mutual funds offer a balanced mix of liquidity, diversification, and expert fund management, making them a suitable choice for both first time and experienced investors. Their open structure allows for flexibility in investing and redeeming based on your evolving financial goals, while the professional management helps navigate market changes effectively.

Whether you’re planning for long term wealth creation, retirement, or other life goals, open ended funds can play a key role in your investment strategy. Explore a wide range of Mutual Fund and take the next step towards building a more secure financial future.

Frequently Asked Questions

1. How an Open End Fund Works?

An open end mutual fund continuously issues and redeems units based on investor demand. The fund's Net Asset Value (NAV) is calculated daily, and investors transact directly with the fund house at this NAV. The total corpus adjusts based on the number of units bought or sold, offering flexibility and liquidity.

2. What is an Example of Open Ended Funds?

Examples of open ended mutual funds include equity funds, debt funds, and hybrid funds that remain open for purchase and redemption on any business day. These funds do not have a fixed maturity and allow investors to transact at the prevailing Net Asset Value (NAV). Several schemes offered by Kotak Mutual Fund, such as its diversified equity and dynamic bond funds, are structured as open ended mutual fund schemes. Investors can choose based on their risk profile and financial goals.

3. What is Open Ended and Close Ended Fund?

An open ended fund allows investors to buy and sell units on any business day, with no fixed maturity. A close ended fund, on the other hand, has a defined investment period and can only be purchased during its New Fund Offer (NFO). After that, it is listed on stock exchanges for trading.

4. How Does Taxation Operate in the Case of an Open Ended Mutual Fund?

Taxation depends on whether the fund is equity oriented or debt oriented, and on the holding period. Short term and long term capital gains are taxed differently. For detailed and updated tax rules, refer to the Kotak Mutual Fund Tax Reckoner.

5. What Are the Drawbacks of an Open Ended Mutual Fund?

Open ended funds are subject to market risks, and the NAV can fluctuate with market movements. There may be exit loads for early redemptions, and emotional investing decisions, such as panic selling during downturns, can affect long term returns. Over diversification in some schemes may also reduce performance potential.

 

Disclaimers

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.

These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation.  The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

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