What are Open Ended Funds? Pros & Cons Of Open Ended Mutual Fund

What are Open Ended Funds?
What are Open Ended Funds?

Based on the structure, Mutual Funds are divided into two categories open-ended and closed-ended. Where open ended mutual funds are the more popular than closed ones.

When you heard the word “Mutual fund” it is predefined that it is one of the safest investment instruments, but if comparing open ended funds with closed ones they are even safer.

The units of these open ended funds are not traded on the stock exchanges and there is no limit on the number of units that can be issued by the fund. Like any other mutual fund, Investors can purchase or sell units from the fund house on any working day at the existing Net Asset Value (NAV).

The NAV is determined by the performance of the underlying securities of the fund. In addition, these schemes do not have a maturity period.

Pros of Open Ended Mutual Funds

Performance over different Market Cycles

Investors can purchase or redeem units from the fund house anytime on a working day in an open ended fund this helps the investor to get a quick glance at the historical performance of the fund and get to know that how it has performed across different market cycles.

Since Investors can exchange units on any working day, they can set up systematic investment plans or SIP to invest a fixed amount in the scheme on regular basis. This is one of the most preferred choices for normal office goers. Further, investing in the market via SIP can also help to build a corpus from scratch.

Professional Management

These funds are managed by the professional and experienced fund managers. If one says that management is the most important criterion for investing in a fund then it’s not incorrect.

Even Large-cap blue-chip companies can give negative returns if bought at the wrong time. The managers of these funds have enough expertise, experience, and resources such as teams of junior analysts risk managers, and portfolio managers to make the right investment decision for the investors.

Also Read: Top 5 Best Fund Managers In India 2021

High Liquidity

Open ended funds are highly liquid you can redeem the units of your fund any time on any working day. In close ended fund you cannot redeem your fund unit till the maturity period.

Diversification Of Portfolios

Generally, open ended funds invest in a range of assets. The stocks belong to a variety of industries and businesses such as some shares in automobile companies some in IT companies and some in financial services. A diversified portfolio not only helps to reduce the risks associated with investments but also led to outperform.

Cons of Open Ended Mutual Funds

Volatile Nature

The Net asset value (NAV) of an open ended mutual fund fluctuates according to the performance of its underlying stocks or securities. Hence, these open ended funds are also prone to market risks.

They are also very volatile due to their diversification. While the fund manager endeavors to contain the volatility by diversifying his investments, these funds carry a certain degree of market risks at all times.

Who Should Invest In An Open Ended Mutual Fund?

Open ended mutual funds are the biggest part of the mutual fund market. Therefore, most investors can invest in these open ended funds. The Investor should keep in mind that to achieve their financial goal, they should invest wisely within their risk appetite and investment period.

Tax on open ended funds

Gains on these funds are also taxed like other mutual funds. Also, equity and debt funds have different tax rules and rates. Therefore, in the case of open ended mutual funds, the tax rules and rates vary with the percentage of investments made by the scheme in debt and equity.

Assuming that the fund invests at least 65% of its total assets in debt instruments, then it is treated as a debt fund for tax purposes.

Assuming that the fund invests at least 65% of its total assets in equity, then it will be treated as an equity fund for tax purposes.

Read the offer document carefully and check the asset allocation to follow the tax rates.

List of Open Ended Funds In India

Here is a list of the top 5 best open-ended mutual funds based on the past 5 years’ performance in India 2021.

Name of the scheme

Min SIP Investment

1 Year Return

3 Year Return

5 Year Return

ICICI Prudential Technology Fund Growth

100

137.8

32.7

25.2

Aditya Birla Sun Life Digital India Fund Growth

1000

113.7

31.8

25.1

TATA Digital India Fund Growth

500

118

29

24

SBI Technology Opportunities Fund Growth

500

95

27

23

Nippon India Pharma Fund Growth

100

57

27

18.5

Frequently asked questions (FAQ)

Q. What is open ended mutual fund?

Open-end mutual funds typically do not limit the number of shares they can offer, and are bought and sold on the basis of demand and supply. They are the most popular mutual funds.

When an investor sells shares, they are bought back by the fund and when investors purchases shares in an open-end fund, the fund issues those shares.

Q. Can I lose all my money in mutual fund?

Mutual funds are the safest investment instruments in the share market the possibility of losing all the money is extremely low. But since there is no guarantee you will not lose money in mutual funds.

In fact, in certain extreme circumstances you could end up losing all your investments. Mutual funds are managed by fund managers who invest in a wide variety of stocks, bonds and commodities. So, there is a very rare chance of failing your mutual funds.

Q. Is mutual fund better than FD?

A Fixed Deposit or FD offers pre-decided returns which do not change throughout the tenure of investments whereas Mutual Funds are dependent on the performance of the market.

They can offer better returns in longer terms. FD rates are averaging 4-5% annually whereas mutual funds perform 15-25% annually.

They can give staggering returns in long term.
Also, some of the Mutual funds are tax benefited. You can have a look on them too.

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He is pursuing BBA, a Passionate trader and his hobby is to write content on business and finance.

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