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Open Ended Mutual Funds – Meaning, Advantages & Disadvantages

What Is Open Ended Mutual Fund?

Investing in open ended mutual funds can be ideal for novices and experienced investors alike. Understanding how it works, and knowing about its advantages and disadvantages can help you make the right investment decision.


Understanding Open Ended Mutual Funds

Typically, every mutual fund gets launched through a New Fund Offer [NFO]. Hence, if you have applied for a mutual fund during the NFO period, you could get fund units at the NFO price. However, after the NFO ends, the mutual fund is officially launched as an open-ended fund. By investing in an open-ended mutual fund, you can enter and exit the fund at any time. On the other hand, a close ended fund does not permit investors to enter or exit after the NFO period has ended, that is until maturity.

Mutual funds are a type of open-ended fund. It's NAV changes every day due to stock market movement and the bond prices of the fund scheme.

You can buy an open-ended mutual fund at its Net Asset Value (NAV) that is based on the fund’s underlying securities.

Open ended fund investments are valued at fair market value that is also known as the closing market value of listed securities. Unlike close ended funds, open ended mutual funds do not have a fixed period for maturity. An open-ended mutual fund does not trade in the open market, and neither does it have a limit on how many units can be issued.

Such funds typically invest in equity or stock markets. They are known as open ended funds because there is no lock-in time for such investments. Hence, you can cancel your investment at any time after investing in this fund type. For instance, on any working day, during business hours, you can request your AMC to make a fresh purchase or redeem your mutual fund units. Generally, such a request is executed on the previous days NAV or the present days NAV depending on the time of submission.


Advantages of open-ended funds

  • Easy liquidity - You can redeem your units of an open-ended mutual fund at any time based on your requirement and convenience. As compared to other forms of long-term investments, you receive the flexibility of redeeming your open-ended mutual fund scheme at the current net asset value.
  • Transparency - You can view the historical performance of an open-ended mutual fund, unlike that of a close ended fund. In a close ended fund, there is no availability of track record and hence the performance of the fund over various market cycles is not revealed to investors. Thus, an open-ended fund can be a well-informed and wise investment decision.
  • Systematic Investment Plan - A viable investment option for a majority of salaried class investors, open ended mutual funds are ideal because of the Systematic Investment Plans offered in it. Close ended funds call for lump sum investment and can be a risky approach for new investors. On the other hand, you can initiate a Systematic Investment Plan in an open-ended fund of your choice without having to worry about making lump sum investments.

Disadvantages

  • Experiences market volatility - Even though open ended funds have a highly diversified portfolio managed by the fund manager, they can still experience market risks. The NAV of an open-ended mutual fund could fluctuate based on how the underlying benchmark moves.
  • Solely reliant on the fund manager - As a mutual fund investor, you do not get to have a say in determining the asset composition of your mutual fund. Instead, a fund manager who is highly qualified with requisite expertise in mutual fund management undertakes all decisions concerning the choice of securities in the mutual fund scheme.


Conclusion

New investors who are looking to understand the stock market can opt for open ended mutual fund schemes. Similarly, if you desire an annual return of 15 to 20%, open funds can be an ideal choice.

Typically, all open-ended mutual funds are managed by professionals and experts in their field. Given that the NAV is updated on a daily basis and the fund is highly liquid, investing in open ended mutual funds can be advantageous. Because open ended funds focus on liquidity and transparency, it can be an ideal match for long-term and medium-term goals.





Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.