Open Ended Mutual Funds

Mutual Funds are generally classified into two types: open-ended mutual funds and closed-ended mutual funds. In this article, our focus will be on the open ended mutual funds and its relevant details. Open ended mutual funds are very popular among the investors.

An open ended fund is a fund which begins once the New Fund Offer ends. It provides for investors to enter and exit the fund any time once it is launched. On the other hand, a close-ended fund is a fund that does not permit the entry and exit of investors once the New Fund Offer period ends, until maturity. The Open-ended funds enables the investor to enter and exit the fund anytime unlike close-ended funds where the investment duration is fixed. The Open-ended funds also facilitate transactions through Systematic Investment Plans and Systematic Withdrawal Plans.

It is generally assumed that when people talk about mutual funds, they tend to mean open ended mutual funds. The units of open ended funds do not trade on the bourses unlike their closed ended counterparts. Also, there is no cap on the number of units that can be issued by the fund. On any working day,Investors can buy or withdraw units from the fund house at the existing Net Asset Value or NAV of the scheme. The Net Asset Value is computed by the performance of the underlying securities of the fund. There is no maturity period in these schemes. All open-ended funds permit investors to select a periodic investment plan while investing. The choice of Systematic Investment Plan mode of investment enables the investor to invest small amounts at periodic intervals.

Open Ended Funds constitute the biggest part of the mutual fund market. Hence, most investors including retail investorsparticipate in open ended funds. The essential thing that needs to be remembered while investing is to invest as per their investment horizon, financial goals, and risk tolerance.

The advantages of open ended mutual funds are listed below:

• On any working day, an investor can withdraw the units of an open ended fund. This combines the necessary component of liquidity to investor’s investment portfolio. Although there are several investment options available providing good returns, most of them have a lock-in period that renders investor money illiquid till maturity. Investor can enjoy maximum liquidity with the help of open ended mutual funds.
• In an open ended fund as investors can buy or withdraw units from the fund house, a quick look at the past performance of the fund can present a view into how it has performed over distinct market cycles. This assists an investor to make a sound decision and invest according to his or her plan.
• As units can be bought on any working day, an investor can initiate a systematic investment plan or SIP to invest a predetermined amount in the scheme on a periodic basis. This is mainly beneficial for salaried investors and people with no investible amount in hand. Also, investing throughsystematic investment plan can also support an investor build a corpus right from beginning.

The disadvantages of open ended mutual funds are listed below:

• The Net Asset Value of an open ended mutual fund variesas per the performance of its underlying securities. Thus, open ended funds are vulnerable to market risks and quite volatile in nature. Even when the fund manager makes all efforts to absorb the volatility by diversifying one’s investments, these funds bearsome degree of market risks every time.
• The open-ended funds are susceptible to large inflows and outflowsunlike close-ended funds. An unanticipated outflow can compel a mutual fund manager to dispose holdings at lowermost prices, bringing about a loss to all unit holders of the fund.
• The liquidity facilitated by open-ended funds can act as adouble edged sword. If it can be of advantage, it can be a disadvantage as well. As there is no lock-in period in case of an open-ended funds, investors might be tempted by feeling of greed to invest more capital in bull markets and mightwithdraw more units in volatile conditions in view of fear.
• • The Open-ended funds also possess exit loads. These charges are levied upon investors if investors exit the fund within certain predetermined time periodsusually up to 1 year. Hence, the final earnings from an open-ended fund decrease if it attracts capital gains tax as well.

The Gains originating from mutual funds are generally taxed. The equity and debt funds have distinct tax rules and rates and are taxed in a different manner. Thus, the tax rules and rates fluctuate with the percentage of investments made by the scheme in equity and debt in the case of Open Ended Mutual Funds. It is treated as an equity fund for tax purposes if the fund invests 65% of its total assets or more in equity and equity-related instruments. Whereas it is treated as a debt fund for tax purposes if the fund invests at least 65% of its total assets in debt instruments.

• What is an open ended mutual fund?

An open ended fund is a fund which begins once the New Fund Offer ends. It provides for investors to enter and exit the fund any time onceit is launched. The Open-ended funds also facilitate transactions through Systematic Investment Plans and Systematic Withdrawal Plans. The units of open ended funds do not trade on the bourses unlike their closed ended counterparts.

• Who all can invest in open ended mutual fund?

Open Ended Funds constitute the biggest part of the mutual fund market. Hence, most investors including retail investorsparticipate in open ended funds.

• What are the advantages of open ended mutual fund?

One of the advantages of an open ended mutual fund is that on any working day, an investor can withdraw the units of an open ended fund. This combines the necessary component of liquidity to investor’s investment portfolio. Also, as investors can buy or withdraw units from the fund house, a quick look at the past performance of the fund can present a view into how it has performed over distinct market cycles. This assists an investor to make a sound decision and invest according to his or her plan.

• What are the disadvantages of open ended mutual fund?

One of the disadvantages of an open ended mutual funds is that they are vulnerable to market risks and quite volatile in nature.Further, the open-ended funds are susceptible to large inflows and outflowsunlike close-ended funds.

• How taxation works in case of open ended mutual fund?

The tax rates depend on the percentage of investments made by the scheme in equity and debt in the case of open ended mutual funds. It is treated as an equity fund for tax purposes if the fund invests 65% of its total assets or more in equity and equity-related instruments. Whereas it is treated as a debt fund for tax purposes if the fund invests at least 65% of its total assets in debt instruments.