What are Open Ended Mutual Fund Schemes?

You must have heard the name of Open Ended Mutual Fund Scheme related to Mutual Funds. Today we will discuss in detail about Open Ended Mutual Funds through this article.

What are Open Ended Mutual Fund Schemes credityatra

In this we will get information about what is Open Ended Mutual Fund Scheme, its features and advantages and disadvantages of this scheme.

Open Ended Mutual Fund Scheme

On the basis of structure or maturity, any mutual fund can be divided into two parts –

  • Open Ended Mutual Fund Scheme
  • Close Ended Mutual Fund Scheme

What is Open Ended Mutual Fund Scheme

Open ended schemes are launched only after the end of any official NFO (New Fund Offer). After the end of the NFO period, continuous buy and sell starts in the fund.

Open Ended Mutual Fund Meaning- As its name suggests, there is no time limit for Entry and Exit. If understood in very simple language, then that mutual fund scheme in which entry and exit can be done by an investor at any time is an open ended scheme.

Here Entry and Exit mean that units can be bought and sold at any time. Also, there is no pre-determined maturity period in Open Ended Mutual Funds.

Features of Open Ended Mutual Fund Scheme

  • Entry and Exit in this type of scheme are based on NAV. The NAV of a fund is worked out at the end of each trading day.
  • There is no lock-in-period in an open ended scheme.
  • Facility of doing SIP, LumpSum, SWP, STP etc. is available in these types of schemes.
  • In Open Ended Mutual Fund, you can sell all the units of your holding at once.
  • In an open ended scheme, there is no restriction on the issue of units to the fund house. They can issue as many units as they want.
  • In such schemes, some part is kept in cash by the fund house to meet the redemption request of the investors.
  • Most of the mutual fund schemes fall under the category of open ended mutual funds. Their popularity is higher than that of close ended schemes.

One thing is worth noting here. As you have read, there is no lock-in-period in Open Ended Schemes of Mutual Fund. But still, most of the open ended schemes usually have to pay an Exit Load of 1% for selling the investment within a year.

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ELSS Mutual Fund – Are open ended or close ended

Close Ended Funds are those which are offered by NFO. At the end of the period of the NFO, it cannot be invested or sold.

Open Ended ELSS- These types of funds also have a lock-in-period of 3 years. After the lock-in period is over, the investor can sell his fund at any time as per his wish.

But new investments can be made in open ended ELSS anytime.

Close Ended ELSS- These give the option to invest only during NFO. There is no option to make fresh investments after the end of NFO.

Closed end ELSS investments can be redeemed after 3 years or at whatever time is decided by the fund house from time to time.

Can Open Ended Fund be converted into Close Ended Fund?

Many times, when the size of a fund becomes too big, it can be decided by the fund manager or fund house to convert the open ended fund into closed ended fund.

In such a situation, all fresh investments in that scheme can be discontinued.

But when this happens, the fund manager has a responsibility to fulfill the redemption request of the investors.

What are Open Ended Mutual Fund Schemes credityatra 1

Advantages of Open Ended Mutual Fund

Most of the investors prefer to invest in open ended schemes only, for which there are several important reasons-

1. High Liquidity- The biggest advantage of open ended mutual funds is its high liquidity. You can buy and sell this type of fund on any working day.

If you ever need money during the investment period, you can easily sell your investment. In this, Buy and Sell transactions are done on the basis of NAV (Net Asset Value).

2. Ease of Track Record Keeping- Due to frequent buying and selling in open ended funds, a historical data of the fund’s performance is available.

Thus the track record or returns of the fund enables an investor to take the decision to invest in the fund.

3. Availability of Systematic Plans- Systematic Plans are available for both investment and withdrawal transactions in Open Ended Funds. Such as SIP, SWP, STP etc.

No such option exists in close ended schemes.

4. Professionally Managed Plans- Open ended schemes have experienced fund managers who manage investor’s funds at very low cost. Fund managers with their expertise and experience strive to bring out the best results for the investors.

5. High Returns- Due to their diversified portfolio, open ended mutual fund schemes make their investors good returns in the long run as compared to other schemes.

Disadvantages of Open Ended Mutual Fund

If something has some advantages, then it will also have some disadvantages. So always choose the scheme for yourself keeping in mind your needs.

1. Volatility- In the event of a market crash or fall, many investors start withdrawing their money from mutual funds out of fear. In order to return the money to these investors, the fund manager is forced to sell the shares of the portfolio at a lower price.

In such a situation, due to the imbalance of cash inflow and cash outflow, all investors may have to suffer.

2. Risk- Being an equity investment, these funds are risky. This risk depends on the volatility of the market.

3. Easy Liquidity- Units in open ended mutual funds scheme can be easily sold anytime. Due to high liquidity, investors are unable to hold their investments for long.

Many investors over-invest in the bull market and sell their investment in the bear market, which is a wrong strategy.

4. Exit Load- Redeeming the invested amount within one year of investment in open ended funds may impose an Exit Load of 1%.

Who should invest in Open Ended Funds?

Well, investing in any fund depends on the investment objective. Open ended funds can be best for investors who want high liquidity on their investments.

Investors who are willing to take cash flow risk and market risk for high returns can also invest in open ended funds. This type of scheme can also be best for investors who want to invest in a diversified portfolio.

Also read: Looking for investment? Here are Best Investment Plans With High Returns 2021

Conclusion

Through this article, we have explained all the factors of Open Ended Mutual Fund Schemes such as What is Open Ended Mutual Fund Scheme, its advantages and disadvantages and all the questions related to it.