Do you know the one place of investment where your options are never-ending? That, without a doubt, would be mutual funds and their environment. The mutual fund environment is never-ending for new explorers, and it is full of opportunities. But, if we have to classify these mutual funds on a broad and basic term – it would be through three types, and they are:
a) Open Ended
b) Close ended
This post is going to talk about open-ended funds in detail.
Open-Ended and Close-Ended Mutual Funds – Explained
Mutual funds in India are classified into two types based on their investing structure, namely open-ended funds and closed-ended funds. The difference with open-ended and closed-ended funds is based on investment flexibility and the simplicity with which they can or cannot be purchased or sold. While the open-ended funds can be bought and sold at any time, closed-ended funds can only be purchased at the time of their introduction and redeemed when the fund’s investing term expires.
What are Open-Ended Mutual Funds?
The number of shares that an open-ended mutual fund can issue is unlimited. The purchase and sale of units in these funds occur on a continuous basis, allowing investors to subscribe and redeem units at their leisure. Open-ended mutual funds also allow for the purchase and sale of units after the NFO (New Fund Offer) period has finished. The NAV (Net Asset Value) disclosed by the fund is used to purchase and sell units.
When an AMC (asset management company) repurchases or sells a fund’s existing units, the number of outstanding units either increases or decreases, causing open-ended mutual funds’ unit capital to fluctuate. Because there is an increase in the flow of money, the fund grows in size when the AMC sells more units than it repurchases. Similarly, if the AMC repurchases more units of the fund than it sells, the fund’s size will be reduced.
Open-ended mutual funds are not required to sell new units on a continual basis, but they must repurchase them at all times. The biggest majority of mutual funds are open-ended, providing investors with a convenient way to invest. For example, you can look at some of the best ELSS mutual funds since they are a great instance of open-ended funds.
Some of the Best ELSS Funds
- Canara Robeco Equity Tax Saver Fund
- Axis Long Term Equity Fund
- DSP Tax Saver Fund
- Mirae Asset Tax Saver Fund
- Invesco India Tax Plan Fund
What is the Difference Between a Close-Ended and an Open-Ended Fund?
The number of shares that can be issued by closed-ended mutual funds is limited. Their unit capital is fixed, and investors are unable to purchase units once the NFO period has ended. It means that investors will be unable to participate or quit the plan until the scheme’s tenure expires. Fund houses, on the other hand, provide investors with a platform to exit the scheme before the end of the duration by listing the close-ended fund on the stock exchange. The number of outstanding units has not changed as a result of the fund’s stock market activity.
Closed-ended funds, which are usually sold through brokers, are prone to trade at a discount to the underlying asset’s value. Investing in a closed-ended fund can be challenging because the fund’s track record is unavailable, and it may involve risks. As a result, it is advised to invest in open-ended fund units instead.
How Can the Open-Ended Funds Out there Benefit You?
- The investor has no restrictions on redeeming the fund’s units. It provides an immediate source of money. And, on the day of redemption, these units might be redeemed at NAV.
- These funds are available for investment and withdrawal via systematic schemes. Investors can choose between a Systematic Investment Plan (SIP), a Systematic Withdrawal Plan (SWP), and a Systematic Transfer Plan (STP) (STP). These can assist in consistently investing a fixed sum in the scheme.
- Open-ended funds invest in a diverse range of assets from a variety of firms and industries. This portfolio diversity aids in lowering the investment’s risk.
- Since the net asset value is established at the conclusion of each trading day, investors can monitor the performance of these funds and make informed decisions.
- Open-ended funds do not demand a large investment. The investor can begin with a low-risk systematic investment plan.
Aside from these benefits, open-ended funds are vulnerable to significant volatility, which is a downside. These funds’ NAVs fluctuate based on the performance of the underlying securities, making them vulnerable to market risks. Although the dangers can be decreased by diversifying the portfolio, there is still some risk.
Exit loads may also be imposed on open-ended funds. Exit loads are fees that investors must pay if they leave a fund before a certain time period, which is usually a year.
So the amount of inflow and outflow in open-ended funds is greater than in closed-ended funds; a sudden outflow can prompt the fund management to sell holdings at the lowest available level, resulting in a loss for all investors.
What are the Taxes on Open-Ended Funds?
Mutual fund gains are not tax deductible. Tax rules and rates differ between equity and debt funds. The tax on capital gains is determined by the fund’s percentage investment in equities and debt instruments.
- If the fund invests at least 65% of its total assets in equity, the tax on gains is calculated as if it were an equity fund.
- If the fund invests at least 65% of its total assets in debt instruments, the tax on gains is calculated as if it were a debt fund.
Everything needs research – including your investments for a better financial stand. That is why you need to do your research before you start investing in any kind of mutual fund at all (though they have lower risks, they have risks, don’t they?) But if you are choosing to invest in open-ended mutual fund schemes, this post points out everything you need to know about it.