Based on their structure, mutual funds can broadly be classified into three types – open-ended mutual funds, close-ended mutual funds, and interval funds. Of these, open-ended funds in India are more popular among investors.

This article will cover everything you need to know about open-ended funds before you consider investing in them.

What is an open-ended fund?

According to the Securities and Exchange Board of India (SEBI), an open-ended fund or scheme is one that is available for repurchase and subscription continuously. The key feature of open-ended funds is liquidity. Moreover, these funds do not have any fixed maturity period. Investors can conveniently purchase and sell units at the Net Asset Value (NAV), which is declared daily.

How do open-ended funds work?

Mutual funds are floated in the market through a new fund offer (NFO). In the case of open-ended mutual funds, an investor can buy or sell units even after the NFO period ends. Also, there is no limitation on the number of units that can be issued nor do these mutual funds have a set maturity date. However, an investor may have to pay an exit load for selling their units in a scheme.

Advantages or Benefits of open-ended funds

Following are some of the advantages of investing in open-ended mutual funds:

1. Liquidity

As an investor, you can redeem the units of your open-ended mutual fund on any working day. While several investment options offer good returns to investors, they are often accompanied by a lock-in period that makes your investments illiquid until maturity. However, most open-ended funds do not have any lock-in period, with the exception of ELSS funds (equity-linked savings scheme) and solution-oriented plans, such as a children’s funds or retirement funds.

2. Different systematic options available

Open-ended funds allow investors to make use of systematic plans, both for investment and withdrawal purposes. Unlike close-ended funds, an investor can choose from between the SIP (systematic investment plan), SWP (systematic withdrawal plan), or STP (systematic transfer plan) methodologies.

3. Availability of track record and past performance

The performance track record of an open-ended mutual fund across different market cycles is available to investors. A glance at this data can give investors a glimpse of the fund’s historical performance. This data can help investors make an informed

Tax benefits of Open-Ended Funds

The tax treatment on open-ended funds depends on whether it is an equity- or debt-oriented fund.

*LTCG on equity funds are exempt from tax for up to Rs1 lakh p.a.

Open-ended mutual funds also offer tax benefits to investors. Investments in ELSS mutual funds, a type of open-ended mutual scheme, are eligible for a tax deduction of up to Rs. 1.5 lac on the invested amount. An investor can thus save up to Rs. 46,800 per annum by investing in ELSS funds provided that they fall under the 30% tax bracket.

Who should invest in Open-Ended funds?

Investment in any mutual fund scheme should depend on an investor’s objectives. Open-ended mutual funds are best suited for investors who are looking for liquid investment options and are willing to undertake cash flow risk and market risk for higher returns.

Additionally, an investor should also meet SEBI’s standard eligibility criteria to invest in mutual funds  in India.

Risk factor in open-ended funds

Following are some of the disadvantages of investing in open-ended mutual funds:

1. Unlike close-ended schemes, open-ended schemes are vulnerable to large inflows and outflows. A sudden outflow could force a fund manager to sell units at unfavourable prices, causing a loss to all investors in the scheme.
2. Open-ended funds also carry an amount of market and cash flow risk. The NAV of these funds fluctuates every day in response to the volatilities in the financial markets.

How to invest in open-ended funds?

Open-ended mutual funds allow you to invest via the lumpsum, SIP, STP, or SWP methods. If you are wondering how to buy open-ended funds, follow these simple steps:

1. Create a mutual fund account with an AMC (Asset Management Company)
2. Complete your KYC (know your customer) formalities if you have not already done it
3. Input all the necessary details, as required
4. Identify the fund(s) you wish to invest in based on your personal and financial goals, risk tolerance, and investment horizon
5. Select the apt open-ended fund(s) that best suits your requirements and choose the method of investment, i.e. lumpsum, SIP, etc.
6. You can give standing instructions to your bank in case you want to invest via the SIP mode. 

Open-ended funds can be a useful investment option for those who have minimal or no knowledge of the markets. It is always recommended to seek the advice of a professional before selecting the right fund(s) for your portfolio. Happy Investing!