Open-Ended Mutual Funds: Overview & Advantages
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Depending on the structure, mutual fund schemes can be classified into three types: interval, close-ended, and open-ended. Among these, open-ended funds are the most popular option among investors.
Want to know what characterises open-ended mutual funds? Keep exploring this page!
Table of contents
What Is an Open-ended Fund?
An open-ended fund can issue an unlimited number of units. Investors can redeem or purchase units from a fund house/Asset Management Company (AMC) on any business day at the scheme’s existing NAV (Net Asset Value). A fund house doesn’t trade the units of open-ended schemes on a stock exchange. The performance of the fund’s underlying securities determines NAV. These funds do not possess a maturity period.
Also Read – https://navi.com/blog/best-hybrid-funds-in-india/
Benefits of Open-ended Funds
Take a look at the advantages of open-ended funds:
High liquidity
Investors can place a redemption request with the AMC on any business day. If one redeems units of a debt-oriented fund, he/she will get the money within 2 working days. Whereas in case individuals redeem their units of an equity-oriented fund, they’ll get the amount within 5 working days.
Available track records
In the case of open-ended mutual funds, an individual can track the scheme’s historical performance over varied market cycles. This allows individuals to make a well-informed decision.
SIP
Since you can buy units whenever required, you can choose to allocate funds to a scheme via an SIP (systematic investment plan). By opting for this investment mode, you can invest a certain sum in a mutual fund scheme at regular intervals.
Although there are various advantages, note that open-ended funds have certain limitations. One of them includes high volatility. In other words, the NAV of these funds fluctuates as per the underlying securities’ performance. While fund managers try to reduce the volatility by diversifying the portfolio, these funds are associated with a certain degree of risk at all times.
Who Should Invest in Open-ended Funds?
Open-ended schemes cover the majority of the mutual funds market in India. Therefore, most individuals can choose to invest in these funds. That said, before allocating funds, individuals need to decide their investment horizon and identify their financial goals.
Furthermore, there are more aspects that you need to consider while choosing an open-ended equity fund. Such factors include the experience of the fund manager, past returns of the fund and expense ratio.
Also Read – https://navi.com/blog/everything-about-dynamic-bond-funds/
Some of the Best Open-ended Mutual Funds in India
Below is a list of some of the best open-ended funds in the country:
| Funds | 5-year Returns |
| Quant Tax Plan – Direct Plan – Growth | 26.52% |
| Quant Active Fund – Direct Plan – Growth | 26.10% |
| PGIM India Midcap Opportunities Fund – Direct Plan – Growth | 24.58 |
| PGIM India Flexi Cap Fund – Direct Plan – Growth | 23.52% |
| Mirae Asset Tax Saver Fund – Direct Plan – Growth | 23.35% |
| BOI AXA Tax Advantage Fund – Direct Plan – Growth | 23.34% |
| Mirae Asset Emerging Bluechip Fund – Direct Plan – Growth | 23.03% |
| IIFL Focused Equity Fund – Direct Plan – Growth | 22.25% |
| Canara Robeco Bluechip Equity Fund – Direct Plan – Growth | 20.20% |
| Navi Large Cap Equity Fund – Direct Plan – Growth | 16.10% |
*Returns and NAV data as of December 16 2021
Taxation of Open-ended Funds
The taxes on gains depend on whether the funds are debt-based or equity-based.
| Fund Type | Tax on LTCG | Tax on STCG |
| Equity-oriented Fund | Holding period: 12 months and aboveTax rate: 10% for above Rs. 1 lakh annually | Holding period: Less than 12 monthsTax rate: 15% |
| Debt-oriented Fund | Holding period: 36 months and aboveTax rate: 20% after indexation benefits | Holding period: Less than 36 monthsTax rate: According to the investor’s tax bracket |
How to Invest in Open-ended Mutual Funds?
Individuals can invest in an open-ended fund scheme via a direct plan or a regular plan.
A direct plan refers to a mutual fund scheme that is offered by an asset management company (AMC) directly. In other words, investors do not have to route the transaction through a third-party agent, for example, a distributor/broker.
On the contrary, a regular plan involves a financial intermediary. Owing to this reason, fund houses have to pay commission in the case of a regular plan, which leads to a higher expense ratio than a direct plan.
You can start investing in any of the different mutual fund schemes offered by Navi via leading online platforms, such as Groww, Kuvera, Paytm Money, Zerodha and INDmoney.
Final Word
Open-ended funds are a suitable option for investors looking for diversification of their portfolio. You can start investing small amounts in these schemes using SIP and redeem the units at your convenience. Alternatively, you can choose the lump sum option and invest the entire amount available with you all at once.
Frequently Asked Questions
Do open-ended funds offer tax benefits?
Yes, an individual investing in an ELSS fund gets tax deduction of up to Rs. 1,50,000 annually on the invested sum. This benefit is applicable under Section 80C, Income Tax Act. Note that an ELSS fund becomes an open-ended scheme only after the lock-in period is over.
What is an expense ratio?
Expense ratio refers to the yearly maintenance charge of mutual funds which includes brokerage fees, administrative costs, advertising expenses, management fees, etc. Make sure to compare the expense ratios of different funds when choosing a scheme from a specific fund category. This is because the net returns of a scheme are impacted by the expense ratio.
What is NAV of a mutual fund scheme?
Net Asset Value (NAV) is the market value of all the securities held by the mutual fund scheme on a particular day. It reflects the performance of a particular scheme on a given day and varies with changes in market prices of the underlying assets.
What is an exit load of an open-ended fund?
An exit load is a percentage of the NAV of a mutual fund charged when an investor redeems the units of the scheme within a certain date. Mutual fund houses charge this fee to discourage investors from redeeming their units and protect everyone’s financial interest.
Should I consider my risk appetite when choosing a mutual fund?
Yes, you should always consider the extent of risk you are willing to take before purchasing units of a mutual fund. For example, if want higher returns and are willing to take a high degree of risk, equity mutual funds would be the best option for you.
Before you go…
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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