What is open ended mutual fund? Which is better open or close ended funds?

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What is an open-ended mutual fund?

Open-ended mutual funds are mostly used as a synonym for mutual funds in general. These funds also provide SIP (systematic investment plan), STP (Systematic Transfer Plan), SWP (systematic withdrawal plan) options to investors. Almost all mutual fund companies provide open-ended mutual funds services.

Open-ended mutual funds just like any other fund collect money from the public via an NFO (Full Form New Fund Offer). But unlike close-ended mutual funds, an investor can invest money via them for an unlimited period otherwise any condition specified.

Close-ended funds and ‘close funds’ are different than each other. A ‘close fund’ may mean that the fund house or the fund manager thinks that the pool of money collected is more than manageable to achieve the investment objective, so he closes the fund inflows. In summary, close funds are open-ended funds that have to stop accepting funds.

For Example, the DSP Small Cap fund had stopped taking in funds from February 2017 till it restarted accepting from September 2018.

Also, read about this related topic: What is close-ended fund?

How do open-ended funds work?

Open-ended schemes collect money from the public and create a pool of money and invest according to their respective objective.

Like any other mutual fund, open-ended funds are bought to the market via an NFO (New fund offer). The fund house can issue as many units as they want to issue, later on as and when the fund receives money from investors. The units are bought and sold at NAV (Net asset value)  declared by the fund.

But in contrast to a closed-end fund, an investor can invest in open-end funds for an extended period of time. Also, he can withdraw money in case he requires it. Investors in this case can take advantage of dollar-cost averaging.

Who should invest in an Open Ended Mutual Fund? 

A salaried person, a small business owner, or any other person or business that receives regular income and needs a good amount of liquidity should invest in open-ended funds. There can be more reason to invest in an open-ended fund.

But as open-ended mutual funds form the largest part of the mutual fund market almost everybody invests in the same, but before investing everyone should keep in mind their respective financial goals, investment horizon, etc.

Learn about equity mutual fund taxation here.

Advantages of Open-ended mutual funds.

Liquidity

An investor can invest or withdraw funds in an open-ended fund anytime he wants; unless otherwise anything specified. This advantage will help an investor manage his own liquidity & and invest over an extended period of time. Funds units will be bought and sold at the NAV declared on that date.

Past Performance Record

In an open-ended fund scheme, an investor can check & analyze the past performance of the fund. The points to analyze include past record to returns, expense ratio, the volatility of returns, etc.  This is not possible in the case of close-ended mutual funds.

Dollar-cost averaging

An investor can put in funds via SIP (systematic investment plan) in an open-ended mutual fund. Through this process, he can invest over a long period of time during all the ups & downs of the market. This can also help him to avoid market fluctuations and help built a handsome corpus over time.

Disadvantages of Open-ended mutual funds.

Market fluctuations 

The portfolio of an open-ended mutual fund scheme fluctuates the same as the market goes through its volatility phases. But, by dollar cost averaging investors can take advantage of the same which is not possible in the case of close-ended mutual funds.

Compulsory cash reserve

The advantage of liquidity can also be a curse, as fund managers of his scheme have to keep a certain amount of funds as cash reserves to meet the liquidity needs. Thus the fund returns are compromised to a certain extent.

The temptation to sell or buy

As these funds are liquid an investor may be tempted to sell or buy his holding at the wrong time because of the fear or excitement of price fluctuation, which may be irrelevant in the long term. SIP is the best option to overcome this problem.

How to invest in open-ended mutual funds

Investors can invest via direct or indirect mode. Indirect mode means buying units via a broker. Direct mode means buying units directly from the company via the respective fund’s website or apps like Groww, etc.

List of Open Ended mutual fund schemes.

Disclaimer:- The below scheme names are just examples, not recommendations.

  • Axis Bluechip Fund.
  • SBI Small Cap Fund.
  • Aditya Birla Sun Life Banking & Financial Services Fund.
  • Parag Parikh Flexi Cap fund.

For more info on the topic: moneycontrol.com

Disclaimer

I am not a SEBI registered investment advisor. This article is for information purposes any scheme or company name mentioned here is just for example & not a recommendation. 

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes. 

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