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Open-Ended Mutual Fund can be bought and sold on demand. An open-ended mutual fund is an investment plan for a group of investors. It can issue and redeem shares at any time. The price at which the units (or you can say shares) are issued in an open-ended mutual fund can be redeemed depending on the Net Asset Value (NAV). Hence, the NAV of an open-ended fund reflects the fund’s performance.
The NAV is calculated at the close of every trading day. Its calculation is based on the value of the mutual fund scheme’s underlying securities.
To understand the open-ended fund better, it will need to be analyzed in comparison with a close-ended fund.
It is the open-ended funds that are more common as they cannot be bought instantly and provide on-the-spot liquidity. This is true for everywhere, whether in India or abroad, In India, to invest in an open-ended Fund, you just need to get your KYC form completed with CAMsonline, and purchase units at any point in time. Whereas, in the case of close-ended funds, the only option that you have is to sell on a stock exchange. Moreover, the prices of close-ended funds are typically quoted at a steep discount. This results in a huge loss for investors.
You don’t need a lot of money to buy an open-ended mutual fund. Because these funds allow to buy and sell units continuously, throughout, since its launch or New Fund Offering (NFO). That enables you to enter or exit anytime. Whereas, close-ended mutual funds only allow investors to purchase units during the NFO period. The units of close-ended funds can be redeemed only when the mutual fund matures.
Open-Ended Mutual Fund v/s Close-Ended Mutual Fund
An open-ended mutual fund allows investors to buy or redeem the units at any time once the NFO duration is over. Whereas the entry and exit of investors in a close-ended fund is restricted to the NFO period. Moreover, close-ended funds have a limitation on the number of units they can issue. When you invest your money in the open-ended mutual fund, more units of that fund get created. Similarly, when you redeem your units, the mutual fund units are taken out of circulation.
With open-ended funds you can use payment mode of Lump Sum Investment, Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), or Systematic Transfer Plan (STP). But in close-ended funds you need to only invest in a Lump Sum, no other facility is allowed.
| Open-Ended Mutual Fund | Close-Ended Mutual Fund |
|---|---|
| Not Required to be listed on a Stock Exchange. | It must be listed on a Stock Exchange. |
| Units can be bought even after the NFO. | Units can be bought Only during NFO. |
| The number of Outstanding Units goes Up or Down. | The number of Outstanding Units is Fixed through the Term. |
| Units are Liquid, can be redeemed at any time. | Units can be redeemed on completion of the term only. |
Distinctive Features & Advantages of Open-Ended Fund
- Lock-In Period: Other than a Tax Saving ELSS fund that has a lock-in period of 3 years, all other open-ended funds are available for purchase and redemption at any point in time. They are extremely liquid and equity fund redemption gets credited to your bank account within 3-7 days. In the case of debt mutual funds and liquid mutual funds, the redemption is done on 1-4 day itself.
- AUM: There is one more thing that we should understand about open-ended funds. When we buy units, the number of units of the fund increase. And when we redeem, the number of units of the fund reduces. Open-ended funds see an increase in their Asset Under Management (AUM) not only due to a rise in market price but also because the outstanding number of units keeps increasing.
- Past Performance: In the case of open-ended funds, you can check the historical performance of the fund and make an evaluation of investment. However, while investing in an NFO of a closed-ended fund, you are not able to see and appraise the performance of the fund over different market cycles on account of the non-availability of track record. This makes investing in an open-ended fund is a well-informed decision.
- Mode of Investment: Open-ended funds provide the option of investing via SIP, into the best mutual fund of their choice. Making it a suitable investment option for a large number of salaried class of investors. However, in close-ended funds, you need to invest a lump sum to buy the units at the time of their launch. It means you are taking a bigger risk.
- Diversification: The open-ended mutual funds provide the investors with a low-cost way to pool the money and buy a diversified portfolio.
- Liquidity: The Open-Ended Mutual Funds allows changes in your mutual fund portfolio at any time. Thereby, you can redeem the units of the poor performers from your holdings.
- Management: You can choose to manage your funds yourself, by picking stocks and bonds with online broking firms. Or you can buy units of an actively managed plan.
Disadvantages
- Market Risk: Despite the open-ended fund schemes maintaining a well-diversified portfolio, they suffer from market risks. The NAV of the fund keeps fluctuating according to the fluctuations in the underlying benchmark.
- Portfolio Composition: Open-ended mutual funds are managed by fund managers. These managers are employed by the Asset Management Companies based on their vast experience in the field of fund management and qualifications. They are authorized to take all the decisions regarding the selection of securities for the fund. Hence, general investors do not have a say in deciding the asset composition of the fund.
When it comes to mutual funds, open-ended ones are the favorite because of their liquidity and transparency. That makes them attractive for investors with medium-term and long-term goals.
Of course, you would be the best decision-maker for your investments. So whichever fund you chose, it is more important to start to invest.
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