An open ended fund is one that begins after the New Fund Offer has finished. It enables potential investors to join or leave the fund at any time after it has been established. A close-ended fund, on the other hand, is one that does not allow investors to enter or exit the fund once the New Fund Offer period expires until maturity. Unlike closed-ended funds, which have a predetermined investment period, open-ended funds allow investors to enter and quit the fund at any time. Systematic Withdrawal Plans and Systematic Investment Plans are also available through open-ended funds.
When most people talk about mutual funds, they are referring to open-ended mutual funds. Units of open ended funds, unlike closed ended funds, do not trade on exchanges. Furthermore, there is no limit to the number of units that the fund can issue. On any working day, investors can buy or sell units from the fund house at the scheme’s current Net Asset Value, or NAV. The Net Asset Value is determined by the performance of the fund’s underlying holdings. While investing in an open-ended fund, participants can choose a periodic investment plan. The Systematic Investment Plan investment mode allows the investor to invest small amounts at regular times. The majority of the mutual fund market is made up of Open Ended Funds. As a result, most investors, including retail investors, invest in the best open ended mutual funds.
Benefits Of Open-Ended Mutual Funds
The following are the benefits of open ended mutual funds:
- An investor can withdraw open ended fund units on any working day. This adds a critical component of liquidity to an investor’s investing portfolio. Although there are numerous investment options that provide decent returns, the majority of them have a lock-in term that makes investor money illiquid until maturity. With the help of open ended mutual funds, investors can experience optimum liquidity.
- Since investors in an open ended fund can purchase or sell units from the fund house, a simple look at the fund’s past performance might provide insight into how it has performed over different market cycles. This helps an investor make informed decisions and invest in his or her plan.
- As units can be purchased on any working day, an investor can set up a SIP, to invest a certain amount in the scheme on a regular basis. This is especially useful for salaried investors and those with no investable funds. Investing with a systematic investment strategy can also help an investor develop a corpus from the start.
Drawbacks Of Open-Ended Mutual Funds
The following are the drawbacks of open ended mutual funds:
- Unlike closed-ended funds, open-ended funds are subject to huge inflows and withdrawals. An unexpected outflow can force a mutual fund manager to sell holdings at the lowest possible price, resulting in a loss for all fund unit holders.
- The growth of the NAV is directly influenced by the performance of the fund’s underlying securities. As a direct consequence of this, open-ended funds are subject to high levels of volatility and are vulnerable to market risks. These funds will always be subject to some level of market risk, no matter how much effort the fund manager puts into spreading out their investments in order to reduce the impact of market fluctuations.
- Exit loads are also present in open-ended funds. These fees are paid on investors who leave the fund within defined time periods, usually up to one year. As a result, if an open-ended fund is subject to capital gains tax, the final earnings will be lower.
- The liquidity provided by open-ended funds can be a two-edged sword. If it might be advantageous, it can also be disadvantageous. Because open-ended funds have no lock-in period, investors may be lured by greed to invest more capital in bull markets and may withdraw more units in volatile situations due to fear.
Open-Ended Mutual Fund Taxation
Gains derived from mutual funds are normally taxed. Equity and debt funds have various tax rules and rates and are taxed differently. Thus, in the case of Open Ended Mutual Funds, the tax laws and rates fluctuate with the percentage of investments made by the scheme in equity and debt. For tax purposes, an equity fund is one that invests at least 65 percent of its total assets in equities and equity-related products. For tax reasons, a fund is considered a debt fund if it invests at least 65 percent of its total assets in debt instruments.
Frequently Asked Questions (FAQs)
Q1. Who is eligible to invest in an open-ended mutual fund?
The majority of the mutual fund market is made up of Open Ended Funds. As a result, most investors, including retail investors, invest in open ended funds.
Q2. What are the benefits of an open-ended mutual fund?
One of the benefits of an open ended mutual fund is that an investor can withdraw the units on any working day. This adds a critical component of liquidity to an investor’s investing portfolio. Furthermore, because investors can purchase or sell units from the fund house, a fast look at the fund’s past performance might provide insight into how it has performed across different market cycles.
Q3. What are the drawbacks of an open-ended mutual fund?
One disadvantage of open ended mutual funds is that they are highly volatile and susceptible to market hazards. Furthermore, unlike closed-ended funds, open-ended funds are subject to high inflows and withdrawals.
Q4. How does taxation operate in the case of an open-ended mutual fund?
In the case of open-ended mutual funds, the tax rates are determined by the percentage of the scheme’s investments in equity and debt. For tax purposes, an equity fund is one that invests at least 65 percent of its total assets in equities and equity-related products. For tax reasons, a fund is considered a debt fund if it invests at least 65 percent of its total assets in debt instruments.