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.
- 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.
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.
Total Expense Ratio - Know All about Total Expense Ratio (TER) Of Mutual Funds
If you have ever considered who pays for mutual fund advertisements, the costs of managing your mutual fund investments, operating costs of mutual fund companies and others, it's time to know about Total Expense Ratio [TER] of mutual funds. As a mutual fund investor, you contribute towards the running costs of managing your mutual fund company, that is the AMC or the asset management company. For example, if you have invested in an equity mutual fund, you could be paying an annual cost of approximately 2.5% of the total value of your investments. Generally, in India, equity funds charge 2.2% to 2.4% as the expense ratio. After adding all the costs together, it is known as the total expense ratio. If the TER is approximately 2.4% per annum, it is proportionately debited each day. Typically, it is seen that if the assets of the mutual funds are small, the expense ratio could be high. For the mutual fund to meet its costs from restricted or a small asset base, it could raise the expense ratio. Similarly, if the net assets of the mutual fund are substantial, ideally the expense percentage must be slim. In September 2018, SEBI initiated significant alterations by bringing ending down the total expense ratio of mutual funds. It also changed the process of providing commissions to distributors. Understanding the elements of expense ratio Numerous charges within the expense ratio are used to run a mutual fund scheme. Mutual fund investors contribute towards the expense ratio on a day-to-day basis, and complete disclosure is revealed every six months by the AMC on the deducted fees. There are five significant components within the expense ratio. These include: Management charges - This is a considerable cost and constitutes an integral portion of the TER. It is used to run the fund office, manage a mutual fund, recruit staff and more. Generally, it is a fixed cost for any mutual fund. Service/GST tax - Effective from July 1, 2017, service tax has been replaced by GST, and today is an integral component of the total cost of a mutual fund. The GST of a mutual fund is approximately 18% which makes it a critical cost component for all mutual funds. Transfer agent charge - Transfer agents are as crucial as registrars in equity investment. Typically, the mutual fund registrar takes care of unitholders’ services that include new investments, processing the changes in ownership, dividend reinvestment, managing accounts, redeeming accounts and more. Since mutual fund houses are unable to handle such a colossal activity on their own, two principal mutual funds transfer agents in India, known as KARVY and CAMS accomplish these activities. Brokerage and statutory charges - These two types of commissions are essential in mutual funds. These fees are applied to execute transactions in equity and debt as part of an individual's portfolio management. Besides, the mutual fund house pays commissions to distributors and brokers who promote their products to investors. In this, there is an upfront brokerage to procure new investors and a trail commission to retain clients. A direct plan can help you to save on brokerage costs and hence could be 70 to 80 basis points lower than a regular plan. Operating expenses - Day-to-day operations and marketing costs are also part of the TER. Fees related to advertising, brand promotion, branding, under marketing costs and hence, regardless of whether you are under a direct or regular plan, every mutual fund investor pays towards these charges. The impact of expense ratio on fund returns Say you have invested ₹20,000 in a mutual fund that has an expense ratio of 2%. This means you have to pay ₹400 to the fund manager, each year to manage your investment in the fund. Simply put, if the mutual fund provides you with a yield equal to 15% with a TER of 2%, your returns will be approximately 13%. Also, the net asset value of your mutual fund is stated after taking into account all the charges and costs. Therefore, it is critical to understand the expense ratio of the mutual fund you are paying to the AMC. Conclusion The total expense ratio plays a significant impact on your returns, especially over the long-term. Seek the best TER for your mutual fund to maximise your gains and create wealth.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Commodity Investment – Reasons to Invest in Commodity Market
The world of investments has a vast number of financial instruments such as shares, stocks, bonds and many more. Commodities, too, are one such investment option available for investment. Even though the commodity market has grown substantially in the last few years, the participation of retail investors in commodities is still limited. However, the commodity market has huge potential and making the right investments in commodities can help improve the performance of your portfolio. What are commodities? Commodities are tangible goods that are either naturally occurring or can be agriculturally grown. Commodities are consumed directly or used as raw materials for manufacturing finished goods meant for public consumption. All commodities can be classified under either of the two categories- Soft commodities- Those, that are grown and cannot be stored for an extended period. Examples of soft commodities include agricultural products such as grains, tea, coffee, and livestock. Hard commodities- Those, that are obtained through mining and extraction. Example of hard commodities includes oil, metals and natural gas. Why should you invest in the commodities market? Commodities play an important role in the development process and hence are building blocks of every economy. Commodity investments can help you diversify your portfolio into a different asset class apart from shares and bonds and enhance the overall returns of your investments. For many of you, the general perception is that the commodity market is complex and hence not something that everyone can dabble into. However, commodity investments can fetch you handsome returns. Here are the top three reasons to invest in commodity markets for all types of investors-1. To diversify your portfolio One of the key factors that determine the success of your financial planning is diversification. Diversification with regards to investment portfolio means investing in various assets that are not correlated to each other of your portfolio in different asset classes. Most of you would be diversifying your portfolio in five major asset classes which include cash, shares, fixed income securities, real estate, and gold. In times of increased volatility in the markets, you are either holding on to cash or investing in gold. Gold is considered the safest haven for investment in turbulent times and Indians tend to invest in gold because it is considered as a symbol of wealth and has ornamental value. However, in reality, the gold in your portfolio is your investment in commodity and just like all the other commodities the returns from it are independent of the returns generated by stocks and bonds. Just like gold, there are other commodity investments whose returns are not correlated to equities and bond markets. The price of any commodity investment is a function of demand and supply and by doing proper research and analysis you can make profits from commodity market investments.2. To provide a hedge against inflation Inflation is the general rise in the price of goods and services over time. For any investment to be fruitful, it is important that the returns generated beat the rate of inflation. Higher inflation effectively erodes the real returns generated by your investments in stocks and fixed income securities. However, in the case of commodities, higher inflation relates to the higher price of commodities. So, unlike other investments, your commodity investments will result in a strong performance when inflation is high. Given the current situation when inflation is constantly on the rise, investing in commodities will provide a hedge against inflation.3. To improve potential returns The prices of individual commodities can fluctuate significantly due to several factors such as demand and supply, the impact of natural calamities, exchange rates and the economic health of the nation. The rise in infrastructure projects in a developing country like ours and also globally has had a positive impact on commodity prices. As the commodity market is still an untapped arena, many of them are trading at a lower price than their actual potential. Proper research and effective implementation of investment strategy in commodities can help investors improve the overall returns on their portfolio. What are the various options to invest in commodities? The commodities market is a very deep market and investors have many investment vehicles to access it. Let us look at the various options available for investors to buy and sell commodities1) Investing in the physical form Commodities such as gold, silver, etc., are bought by investors in physical form. However, not all commodities can be bought in physical form as it has its drawbacks of storage and spoilage. Even in the case of precious metals security and insurance increase the cost of your investment. Moreover, most of the time you want to invest in a commodity, not for end-use but to make profits if you anticipate that the price will increase. So, buying a commodity in physical form, except for precious metals, is generally not recommended for retail investors.2) Investment through commodity futures One of the most common ways to trade in commodities is through a commodities futures contract. It is a standardised agreement to buy or sell fixed quantities of the underlying commodity at a predetermined price on a specific date as mentioned in the contract. Also, commodity trades happen electronically through commodity exchanges where investing real-time commodity is possible. Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX) are two of the many commodity exchanges present in the country which help investors trade in commodities. All the commodity exchanges come under the regulation of the Forward Markets Commission (FMC). 3) Commodity ETFs Commodity ETFs are another popular investment option available for retail investors to diversify their holdings in commodities. Commodity ETFs invest in a single commodity and physically hold and store it, invest in a commodity futures contract or invest in a commodity index that tracks the performance of multiple commodities. Investors can invest in commodity ETFs electronically in their Demat account. 4) Commodity Stocks Investors who are not comfortable with investing in commodity futures or ETFs can diversify their portfolio in commodities is by investing in commodity stocks. Commodity stocks are stocks of those companies which are directly or indirectly related in the manufacturing process of the commodity and hence have a positive correlation with the commodity. For example, if you feel that the steel prices are going to increase, then you can invest in the stocks of various steel companies listed on the exchange. 5) Mutual funds One of the biggest reasons for an investor to shy away from commodity investment is that commodity investments require a lot of time, knowledge and expertise to make the right investment choices. However, now SEBI has permitted mutual funds to invest in the commodities market through the exchange-traded commodities derivatives (ETCD) route. Thus, retail investors can now participate in commodity markets in a structured manner through professionally managed mutual funds. Takeaway Commodities are a broad and diversified asset class that offers a great investment opportunity to investors. Given the high inflationary pressure and volatility in the markets, dedicating a small portion of your portfolio to commodities will help enhance the overall performance of your investments. Investing in commodities may look intimidating and you may feel a little hesitant to explore your options, but correct guidance from an experienced financial advisor can help you understand the nuances of commodity markets and make the right investment decisions as per your investment needs. Financial advisors at IndiaNivesh possess the requisite expertise and experience to help and guide you with investments in commodities markets.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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