Sharekhan Blog

What are Open-Ended Mutual Funds?

  • Mar 4, 2024

Unlike other investment options that depend on rigid issuances, open-ended funds are flexible and professionally managed, making them accessible to investors with various wealth-creation interests.

In this article, we will learn to help market participants understand the mechanics and nuanced advantages of open-ended funds. It provides perspectives that can help investors harness these funds optimally.

Open Ended Funds Meaning 

Open ended means the access to capital market wealth creation democratises amid digitisation, and open-ended mutual funds emerge as retail participation enablers through on-tap availability aligned with liquidity needs rather than depending upon discrete issuances or secondary market exits.

Thereby open-ended structures allow straightforward entry and redemption directly via fund houses based on current net asset values dynamically reflecting portfolio market values. This grants flexible control in determining holding periods. Further enabling fractional unit purchases aids affordability.

By keeping corpus unlimited based on popular demand rather than limiting units artificiality, open-ended funds allow tapping into professional management upholding strategy consistency around diversified market-linked assets without maturity constraints. Thereby passive hands-off exposure finds fruition through inherent liquidity and accountability sustaining growth compounds long-term. 

With abundant style options suiting risk appetites spanning equities to debt, open architecture accommodating evolving investor priorities makes open-ended meaning universal channels democratising wealth creation for all. No wonder they command mainstream mindshare today.

Advantages of Open Ended Mutual Funds

Here is a brief overview of the benefits of investing in open-ended mutual funds:

?      Highly Liquid 

Investors can redeem units of an open-ended fund on any working day, providing flexibility in actively managing holdings. This is in contrast to locked structures that require waiting on issuances, secondary sales, or maturity payouts. Open-ended funds significantly improve portfolio liquidity as a result.

?      Performance Analysis

With perpetual availability, historical performance analysis becomes easier - determining strategy efficacy across various capital and economic cycles. This empowers informed selection suiting investment horizons based on achieved upside consistency and intermittent risk reversals.

?      SIP Installments

Open liquidity also allows small measured purchases via SIPs, optimising affordability and passive compounding uninterrupted by rigid schedule constraints. Thereby, open-ended funds aid goal-based wealth creation from modest starts to compounding wealth quietly.

Disadvantages of Open Ended Mutual Funds

Although there are many benefits, open-ended operational dynamics present unique challenges that need to be addressed. These challenges require additional mitigation measures.

?      High Volatility 

With portfolio values linked directly to live market pricing, interim NAVs tend to be more volatile than fixed return instruments - necessitating longer holding ability to ride out storms. Thereby, risk appetites need alignment.

?      Liquidity Risks

Unpredictable large-scale redemptions may pressure fund managers to unwind positions hastily at unfavourable junctures to arrange payouts - thereby causing avoidable erosion temporarily. However, prudent call staggering helps contain the impact.

?      Cashflow Uncertainty 

Investments in open structures are vulnerable to sudden changes in investor behaviour, unexpected changes in the Net Asset Value (NAV), or the risk of being forced to sell assets at arbitrary times, which can cause difficulties in managing cash flow.

Therefore, it is important to carefully monitor the investment and create contingency plans that take into account potential warning signals. However, having a commitment horizon that is specifically tailored to the investment can help to mitigate these risks.

Who Should Invest in an Open-Ended Mutual Fund?

Open-ended mutual fund alignments cater to most investment objectives, benefiting short and long-term horizons equally, whether they are strategic priorities or one-time events.

?      Wealth Creators

SIPs optimise systematic value acceleration, while lump sum entries allow the mirroring of personalised milestones. Open-ended flexibility aids in pursuing goals uninterrupted as per needs.

?      Passive Investors 

For those unwilling to select or track specific stocks directly, open-ended funds enable affordable, hands-off professional management exposure, harnessing upside potential still. Thereby, market linkages stay plugged in safely.

?      Retirees

Steady calculable payouts through dividend plans offer secured cash flows, substituting annuity earnings partially if desired, while growth plans retain reinvestment compounding potential simultaneously.

Open-ended mutual funds trading is versatile tools that create customised solutions. However, taxation should always be considered before committing units to align structures.

Tax on Open-Ended Funds Gains

Although open-ended mutual funds can be beneficial, it's important to note that long-term capital gains exceeding ?1 lakh are taxed without indexation at 10% for equity funds and 20% for debt schemes after one year. This means that the choice of equity or debt plans can determine the taxation rates and outgo impacts.

Conclusion

Open-ended mutual fund structures uniquely fuse flexible liquidity options with professional portfolio management, optimising accessibility for varied investing needs affordably. Thereby, they emerge ubiquitous channels democratising safer capital market participation and upholding strategy consistencies around diversified assets without rigid holding constraints. Open-ended funds are versatile and can sustain wealth creation ambitions through prudent alignment to personalised objectives.

Team Sharekhan
by Team Sharekhan

We care that your succeed

Leaving no stone unturned in creating a one-stop shop for the latest from the world of Trading and Investments in our effort to Make the Markets work for YOU!

Recent posts

Reasons Behind Investors Losing Money in Futures & Options

17 May 2024

Sharekhan’s Survey  unveils reasons behind investors losing money in Futures & Options Trading—an issue flagged by SEBI

Read More

India's Top Retail Broker & Analysts Awards

16 May 2024

A BIG thank you to our customers for Sharekhan being recognised as India’s No. 1 Retail Broker & our Research Analysts also winning top ranks.


Read More

What Is Large Cap Fund?

2 May 2024

Large-cap companies are well-established entities with a respectable vintage and reputation.

Read More

Intraday vs Delivery Trading: Which One is Right for you?

30 Apr 2024

Trading platforms in India offer retail investors easy access to equity markets; an oft-asked question is the suitability between utilising delivery-based investing versus higher velocity intraday trading.

Read More

Stock Market Timings in India

30 Apr 2024

India's stock markets play an important role in the growth of its economy and wealth creation for investors. But to actively participate in equity trading avenues, having a sound understanding of exact stock market timings and hours is key for tra

Read More