What are Open-Ended Mutual Funds and How to Invest in them?

When it comes to investing in mutual funds, one of the first terms you’ll encounter is open-ended vs closed-ended funds. The flexibility and liquidity of open-ended mutual funds will make them a popular choice for retail investors. But what are open-ended funds exactly? And how to invest in them wisely? 

This blog is a guide for you to understand what is open-ended mutual fund, its types, benefits, examples and the process of investing in detail. Come, let’s explore it together! 

What Are Open-Ended Mutual Funds?

Open-ended mutual funds are a type of investment fund that does not have a fixed maturity period. So, the investors can buy or redeem units at any time based on the fund’s NAV (Net Asset Value). Unlike closed-ended funds, which are traded in stock exchanges and have lock-in periods, open-ended funds allow transactions between the investor and the fund house.  

In simple terms, open-ended funds are “open” for transactions throughout the year.

Types of Open-Ended Funds

There are various types of open-ended mutual funds, some of them are given below;  

Types	Definition
Equity Funds	These funds allow you to invest primarily in stocks and aim for long-term capital growth.
Debit Funds	Invest in bonds, treasury bills, and fixed-income instruments.
Hybrid Funds	To balance risk investors can use this fund; it is a mix of equity and debt.
Index Funds	Track a specific market index like Nifty 50 or Sensex.
ELSS (Equity Linked Savings Scheme)	It’s like tax-saving funds with a 3-year lock-in period.

Benefits of Open-Ended Mutual Funds 

Here are the key benefits of investing in mutual funds open-ended: 

Benefits	Definition
Liquidity	By using this method, you can enter or exit anytime based on your needs.
Transparency	Daily NAV (Net Asset Value) disclosure will allow you to easily track fund value.
Diversification	Even a small investment is spread across various securities.
SIP Option	Systematic Investment Plans will make regular investing simple and make it a habit.
Flexibility	You can switch between funds or set investment goals easily.
Professional Management	These funds are managed by skilled fund managers.

Drawbacks of Open-Ended Mutual Funds 

Despite their advantages, open-ended funds have few limitations; 

Drawbacks	Definition
Market Risk	The value of funds will fluctuate with market conditions.
Exit Charge	Some funds charge a fee for early withdrawals.
Over-trading	Frequent buying and selling processes will lead to transaction costs and also affect returns.
Performance Variation	Returns are not guaranteed because it depends on the market cycles.

Real-Time Example of Open-Ended Fund

If you invest ₹10,000 in an open-ended equity mutual fund, the current NAV is ₹50, and you receive 200 units. After a few days, the NAV increases to ₹60; at that time your investment grows to ₹12,000. 

Now you have the right to choose to redeem units anytime or continue investing through SIP. This flexibility and ease of entry and exit will make the open-ended mutual funds highly convenient for all investors.  

How do Open-Ended Funds Work?

The process of open-ended funds is given below with the flow; 

1. Fund House Offer Units: Investors can buy units directly from a mutual fund. 

2. NAV Calculation: Daily NAV is calculated as; 

NAV = (Assets – Liabilities)/Number of Units 

3. Purchase & Redemption: Investors can transact based on the latest NAV. 

4. Fund Utilization: Collected money is invested as per the fund’s objective. 

5. Generate Returns: Gains are reflected in the daily NAV. 

Open-ended funds adjust their corpus size based on the buying and selling of investors.

How is Open-Ended Fund Taxed?

The taxation depends on the type of open-ended fund that you selected. Debt and equity funds have different types of tax rules and rates, so make sure you check everything before investing.  

🠖 A fund is considered a debt fund when your total asset is 65% or more and is allocated to debt instruments. 

🠖 On the other hand, if your fund allocates at least 65% of your total assets to equities and that is considered as equity fund. 

How to Invest in Open-Ended Mutual Funds?

You can invest in open-ended mutual funds during two periods, they are;  

🠖 NFO Period: NFO is the initial offering period when a new mutual fund scheme is launched. During this period investors can subscribe to the fund at a fixed price; the period typically lasts 3 to 15 days.

🠖 Post NFO Period: After the NFO period ends, the scheme is automatically launched. Now the fund is available for investors to continue purchase and redemption. So, they can invest anytime, and the units are based on the current NAV.  

Conclusion

Open-ended mutual funds are one of the favorite terms for beginners and experienced investors because of their flexibility and diversification. If you want to save money for your retirement or vacations, both long-term and short-term goals, you can use this method.  

But before entering the market, you have a proper understanding of open-ended mutual funds. Then only you can make smarter financial decisions. So, create an account in Navia and reach your goal quickly. 

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DISCLAIMER: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Brokerage will not exceed the SEBI prescribed limit.