Mutual funds are popular among entry-level investors because of the favourable balance they provide between risk and return. Mutual funds can be defined as a form of venture which includes investing the money put together from various investors into a diversified range of securities. They are managed by professional fund managers who invest your capital for you following industry best practices and the highest standards of portfolio management. The investors are issued mutual funds in proportion to their investments. It is a must for a mutual fund to be registered with SEBI (Securities and Exchange Board of India), for it to be eligible for collecting finances from the public.
What is an Open-ended Fund?
Open-ended mutual funds are a category of mutual funds in which there is no time barrier for entry or exit. In such funds, the net asset value or NAV determines the units sold or bought. NAV keeps changing daily in accordance with the changes in the prices of bonds and stocks in the market. No maturity time is prefixed in such funds. The units of the funds are taken off the market just as the investor cashes his/her units invested. Although, if the units are redeemed within a year, the investor is liable to be charged an exit fee.
Open-ended mutual funds are handled by a professional fund manager and usually have low entry barriers. So, these funds are considered to be a great option for people who are not able or willing to monitor their investments very closely but desire better returns.
What is an open-ended mutual fund?
An open-ended mutual fund is an investment that allows the investors to purchase and redeem units at any point in time during its tenure. It allows pooled investment and withdrawal options for all the investors thereby allowing for continuous new contributions. There are hypothetically infinite potential outstanding shares in these funds. The portfolio’s NAV at the end of every day determines the price of the open-ended shares.
Working of Open-Ended Funds
As the name suggests, an open-ended fund is open for investments at all times. The shares or units can be issued to the buyers whenever they enter the fund. When new shares are bought, the funds generate replacement shares which are new shares, whereas when the shares are sold off, they are taken out of the pool of shares. This buying and selling of shares is done on the basis of their NAV which is computed at the end of each trading day. At times, the fund might sell off a part of its investments in order to reimburse the investors who exit if they redeem a considerable amount of their shares.
Open-ended funds provide an easy and affordable way for investors to accumulate a diversified portfolio of shares that can help them achieve their financial goals. These funds are accessible even to small investors because of the low entry barriers.
Often investors confuse open-ended funds with close-ended mutual funds. The next section looks at the key differences between the two.
Open-Ended Funds vs Close-Ended Funds
To better understand what is an open-ended fund, a comparative analysis of open-ended funds and closed-ended funds is done on the basis of:
Open-ended funds are very liquid as they can be redeemed at any time. Whereas, close-ended funds are not liquid due to a fixed maturity period, only after which they can be redeemed.
Managing funds is more complex in open-ended funds because there is a certain level of pressure on the fund managers to comply with the objective since the investors can redeem at any time if the fund is underperforming. While in closed-end funds no such pressure haunts the fund manager.
Open-end funds are not traded on stock exchanges as opposed to closed-end funds.
Open-end funds are bought on the basis of present NAV allowing 100% returns on the value of securities and assets. While closed-end funds are traded at discounts to their NAVs due to the pressure of liquidity.
Open-end funds can be through SIPs or in a lump sum with an investment as low as Rs. 500. Whereas investments in closed-end funds can only be done during NFO and not through SIPs and the minimum investment value is usually Rs. 5000.
Advantages of Open-ended funds
Open-ended funds have a number of pros that give them an edge over other investment options. Some of the pros are:
Since there is no fixed maturity period, these funds have the benefit of flexible redemption at the prevailing NAV. This accounts for the greater liquidity of open-ended funds.
Since an investor can enter or exit the scheme as they deem fit, open-ended mutual funds provide a great degree of flexibility not often seen in other financial instruments.
The track record of previous performance data of the funds across various market cycles assists the current investor in making better investment decisions.
The investment and withdrawal plans have availability of options like SIPs (Systematic Investment Plans), SWPs (Systematic Withdrawal Plans), and STPs (Systematic Transfer Plans).
Professional Fund Manager:
The funds are managed by experienced fund managers on the basis of their expertise.
The portfolio of open-end funds includes investments in diversified industries reducing the associated risks and amplifying the associated returns.
To Sum Up
Open-ended mutual funds are a great way for investors to tap the equities market. They are especially suited for investors who do not have a fixed time-frame for their investment and want their portfolio to be closely allied to the market conditions. Because of their low entry barriers and the flexibility they provide to enter and exit the fund, open-ended mutual funds are popular among new investors. However, it needs to be borne in mind that like all equity-based investments, open-ended mutual funds too are subjects to market risk and investors must perform thorough due diligence before investing their hard earned capital into any financial instrument.