How Do Open-Ended Mutual Funds Work?

One of the most sought investment vehicles today, without a doubt, is mutual funds. Why are mutual funds so famous, you may wonder. Well, with mutual funds, you can be sure that there is quite a large variety. In the case of mutual funds, you can start investing from Rs. 500. You can invest for the long term, short term, and much more. So, here we are going to be talking about one of those types. 

Let's talk about open-ended mutual funds, shall we?

What is the Meaning of an Open-Ended Mutual Fund?

The NAV of open-ended mutual funds changes on a daily basis based on stock market movement and changes in bond prices. Investors can purchase any fund at its Net Asset Value (NAV). The fund's NAV, or Net Asset Value, is determined by the performance of the fund's underlying securities. Investors can purchase and redeem units from the fund house at the scheme's current NAV. In other words, open-ended mutual funds can be purchased and redeemed on any working day.

Typically, every mutual fund is introduced through a New Fund Offer (NFO). As a result, if an investor requests an NFO, fund units are assigned at the NFO price.

After the NFO, however, the mutual fund was introduced as an open-ended fund. An open-ended mutual fund allows investors to enter and quit the fund at any time. Closed-ended mutual funds, on the other hand, do not allow investors to enter or quit after the NFO period. The investor must remain until the fund's maturity date.

Each fund has its own fund manager. They manage the fund's investments and make investments for the fund's portfolio. As a result of the fund management charge, these funds are subject to expense ratio.

Now that we know what an open-ended mutual fund is, let's know more about it.

How Does an Open-Ended Mutual Fund Work?

On any working day, investors in this fund can redeem or purchase units at the current NAV or Net Asset Value. The performance of the fund's underlying securities determines the NAV. So, how do these funds function?

In layman's terms, open-ended mutual funds are mutual funds that are floated through an NFO. For open-ended mutual funds, investors can sell or buy units after the NFO period ends.

Another distinguishing feature of this fund is the lack of a maturity period. However, if investors decide to sell their units in the plan, they may be required to pay the exit load.

What is the Perk of Investing in an Open-Ended Mutual Fund?

Here are some of the major pros of investing in open-ended mutual funds.

a) You Know What Exactly Happened

Unlike a closed-ended fund, the open-ended fund's previous performance can be viewed. It provides a short snapshot of the fund's past performance throughout several market cycles. Annual returns, trailing returns, rolling returns, and other metrics are included in the previous performance report. As a result, it assists an investor in making sound investment decisions.

b) Liquidity

Investors can redeem their units from this fund at any moment, depending on their needs and convenience. In comparison to other long-term investments, the ability to redeem funds is more flexible. The open-ended scheme's funds are redeemed at the current Net Asset Value NAV. This gives a much-needed layer of liquidity to the investor's portfolio.

c) You Can Find Systematic Plans

Open-ended mutual funds allow investors to make systematic investments and withdrawals. The investor can set up SIP, SWP, and STP according to their needs. SIPs are appropriate for salaried investors or those who do not have an investable surplus. SIP investing also aids in the creation of a corpus from the ground up. Closed-ended funds, on the other hand, do not have any systematic options.

d) You Get Access to Professional Management

Every mutual fund is actively managed by a fund manager. These fund managers have the expertise, experience, knowledge, and resources to help investors make the best investing decisions. This also allows investors to gain market exposure while under professional supervision.

e) Portfolio Diversification is a Given

In India, open-ended funds offer a diverse selection of assets. Debt, equities, index funds, ETF funds, and other asset classes are examples of asset classes. This enables investors to create a diverse portfolio based on their financial goals and investment objectives. Diversifying the portfolio minimizes the total risk.

f) You Know Your Returns Are Better

In comparison to other investment plans, these funds provide high returns and capital appreciation. It is appropriate for investors to meet their long-term and short-term financial needs based on their investment objectives.

g) You Can See Through It All

Mutual funds that are open-ended do not trade on the stock exchange. Shares are purchased and sold directly from the fund company. As a result, no mediators are involved. Investors in mutual funds have complete transparency over their investment portfolios.

What are Some Things that You Have to Look Out For When Investing in Open-Ended Funds?

The following are some of the limitations of investing in open-ended funds.

a) Risk is Inevitable

The liquidity provided by mutual funds can sometimes be negative. Investors can buy and sell units at any time, which increases risk. Because there is no lock-in period, investors want to redeem funds when the returns are favorable. Also, some investors are enticed to invest more during a bull market and may redeem units during a bear market.

b) Cash Reserve

The reason for keeping a cash reserve is that the fund manager cannot promptly sell securities in the event of substantial redemptions. As a result, the fund manager must keep a large cash reserve to meet redemption requests.

c) There is Always an Exit Load

Exit loads are common in open-ended funds. Some fees are payable when the fund is exited, usually within one year. As a result, the fund's earnings decrease. Individual investors are also subject to capital gains tax.

Conclusion

You know the perks of investing in open-ended funds, and so do you about the drawbacks. Generally, all mutual funds carry some level of risk. As a result, as an investor, you must thoroughly read the policy statement before investing. It also aids in comprehending the asset allocation and other factors provided by the fund company, as well as where the money is placed.