What Are Open-ended Mutual Fund Schemes?

Posted On Wednesday, Jan 17, 2024

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Every individual has different financial goals to achieve, thus their investment objectives are different from one another. To ensure their financial goals are achieved on time, it is crucial to select the right investment avenues that align with their investment goals and style. Today, mutual funds have become one of the most popular investment avenues due to their good  return potential and ability to provide exposure to different asset classes that help you create a diversified portfolio. With several categories of mutual funds available for investment, an investor can choose the best-suited funds based on their risk appetite, time horizon, and investment objectives.

Mutual funds are broadly classified into two main types – Open-ended Mutual Funds and Closed-ended Mutual Funds. When speaking of mutual funds, we typically speak about Open-ended Mutual Funds. This article elucidates everything you need to know about Open-ended Mutual Fund Schemes.


What is an Open-ended Mutual Fund Scheme?

When a mutual fund scheme is launched during an NFO i.e. New Fund Offer, it is clearly structured as an Open-ended Mutual Fund Scheme or a Closed-ended Mutual Fund Scheme.

An Open-ended Mutual Fund scheme allows investors to enter and exit the fund any time after it reopens for fresh subscriptions after the NFO period. So, an Open-ended Mutual Fund scheme is open for the investors to purchase and redeem the units at the prevailing Net Asset Value (NAV) at any point in time. The NAV of the fund is determined by the performance of the underlying assets of the fund.

On the contrary, a Closed-ended Mutual Fund does not allow entry and exit to the investors after the NFO closes. Meaning, that it is available for purchase only during the NFO period. Once the NFO period is over, the scheme is closed for the subscription. After the maturity of the scheme, investors can redeem their investment. Besides, these funds are listed on the reputed stock exchange to provide liquidity to the investors.

What are the benefits of investing in an Open-ended Mutual Fund Scheme?

Here are the key benefits of investing in an Open-ended Mutual Fund Scheme:

Easy Liquidity:

Compared to closed-ended funds, open-ended Funds offer higher liquidity as the investors can redeem the funds at the current NAV as per their requirements and convenience.

Actively Managed Portfolio:

The Open-ended Mutual Fund Schemes are actively / passively  managed by Fund Managers, who are experts with adequate experience and have the resources to make the right investment decisions.

Record of Past Performance:

As Open-ended Mutual Fund schemes are more popular, their performance data is easily available on many financial websites. Investors can easily track the historical performance data of Open-ended schemes that can help them make better investment decisions.

Potential for Good  Returns: 

As most of us are aware, mutual funds have the potential to generate good  returns compared to many other investment instruments. The Open-ended Funds are actively managed and have the potential to earn you good  returns in the long run, depending upon the performance of the underlying securities.

No Need for Large  Funds to Start Your Investment:

The Open-ended Mutual Fund schemes allow you to invest via a Systematic Investment Plan (SIP) where you can invest a small fixed amount regularly (most commonly, monthly). So, you can start your mutual fund investment journey even when you do not have large  funds to invest at a time.


What are the limitations of investing in an Open-ended Mutual Fund Scheme?

Risk:

Any market-linked investment comes with its share of risk, and Open-ended Mutual Fund Schemes are no exception to this. Even though the fund manager actively manages the scheme, and the investment is diversified, it still involves market risk depending on the type of mutual fund scheme. The NAV of the scheme fluctuates daily based on its underlying assets, making the investment highly volatile.

Exit Load:

Most Open-ended Mutual Funds (especially the equity-oriented ones) charge the investor with an exit load when they redeem the investment within one year from the date of investment, thus reducing the investor’s total earnings from the fund.

Who should invest in an Open-ended Mutual Fund Scheme?

Before investing in mutual funds, it is crucial to ensure your investment goals are aligned with the mutual fund scheme you have selected. It provides you with the desired diversification in your investment portfolio. The carefully selected Open-ended Mutual Fund Schemes, based on your risk appetite, time horizon, and investment objectives, can help you achieve your investment goals.


Taxation of Open Ended Mutual Funds
The taxation of open-ended funds depends on the holding period and the nature of the asset class -  equity- or debt-oriented fund.

Type of fund

Particulars

Short-term capital gains tax (STCG)

Long-term capital gains tax (LTCG)

Equity-oriented scheme

Holding period

Up to 1 year

More than 1 year

Tax rate

15%

10%*

Debt-oriented scheme

According to the tax slab of the investor irrespective of the holding period as the indexation benefit is removed.

*LTCG up to Rs1 lakh p.a. are exempt from tax

Open-ended mutual funds such as ELSS offer tax benefits to investors. Investments in ELSS are eligible for a tax deduction of up to Rs. 1.5 lac on the invested amount. An investor falling under the highest tax bracket of 30% can thus save up to Rs. 46,800 per annum.

How to invest in an Open-ended Mutual Fund Scheme?

If you want to invest in a regular plan of Open-ended Mutual Funds, you can take the help of a mutual fund distributor who will guide you to choose the right mutual fund schemes that suit your requirements.

However, if you want to invest in a direct plan of Open-ended Mutual Funds, it makes sense to consult with a SEBI registered investment advisor or invest directly to choose suitable schemes and create an optimal investment portfolio.

Follow these simple steps to invest in open-ended mutual fund:

  • Open a mutual fund account with an AMC (Asset Management Company) through the company's website or offline at the physical office location.
  • Provide personal information and complete the necessary Know Your Customer (KYC) documentation. This usually involves providing identification documents, proof of address, and other relevant details.
  • Select the fund(s) you wish to invest in that best suit your requirements based on your financial goals, risk tolerance, and time horizon. Consider factors like the fund's investment strategy, past performance, fees, and the track record.
  • Choose the mode of investment, i.e. lumpsum, SIP, etc.

To Conclude:

As discussed earlier, investment in Open-ended Mutual Fund Schemes comes with several benefits. You get an actively managed portfolio that has the potential to earn good returns and create wealth while also offering the option to easily liquidate the investment as per your requirement. However, remember that mutual fund investment carries market risk. Hence, before investing, it is essential to assess your risk profile and understand the portfolio allocation and other factors of the scheme you have shortlisted for investment.


Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.


Mutual Fund investments are subject to market risks read all scheme related documents carefully.

Above article is authored by Quantum.

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