Finance

Open-End Mutual Funds

Open-End Mutual Funds

An Open-End Fund is an associate degree investment option. It involves pooling in cash from investors for investment in a very style of underlying securities. A mutual fund house issues unit of mutual funds to investors in proportion to their investment money. The objectives of the mutual fund are disclosed within the offer document. The investors share profits and losses in relation to their investments.

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A mutual fund should be registered with the Securities and Exchange Board of India (SEBI) before it will collect funds from the public. On the premise of structures, mutual funds are often classified into 2 categories: Open-ended mutual funds and Close-ended mutual funds. Open-ended schemes are on the market for subscription and repurchase on a nonstop basis. there’s no mounted maturity period. Investors have the choice to buy and sell units at NAV that are asserted on a daily basis. The past performance of those assets is often half-track which permits the capitalist to form a sophisticated decision. If the investor is trying to find liquidity alone, these funds are a good option.

How Open-End Mutual Funds work?

An open-end fund issues shares, it is always open to investment—hence, the name. Purchasing shares replaces the previous ones, whereas selling shares takes them out of circulation. Transaction of shares takes place at their NAV. The daily basis of the net asset value is on the value of the fund’s underlying securities which is calculated at the end of the trading day. If a large number of shares are bought, the fund may sell some of its investments to pay the selling investors.

An open-end fund enables investors to pool funds and acquire a diverse portfolio that represents a particular investment objective in a convenient and low-cost manner. The fund closes to new investors when it realizes that the total assets have become too large to execute its stated objective effectively.

Example of Open-End Mutual Funds:

These are a few names of mutual funds being traded in the market currently: ICICI Prudential Technology Fund Growth, TATA Digital India Fund, Aditya Birla Sun Life Digital India Fund, Franklin India Technology Fund Growth, etc.

Advantages:

  1. Access to liquidity: There are no restrictions on the investor to redeem the units of an open-ended fund, this leads to access to liquidity to the investors at any time they want. Also, the investors can redeem the funds as per the net asset value on the day of redemption.
  2. Past performance: Investors in these funds may evaluate the results of the funds in the past. The available historical data aids the investor in making the right investment choices.
  3. Various systematic options available: Investors get to make use of systematic plans for making investments and withdrawing. The investor can choose from SIPs, SWPs, and systematic transfer plans.
  4. Professionally managed plans: The professional managers have the expertise, experience, and resources to make the right investment decision for the investors.
  5. Diversified portfolios: These funds invest in a wide range of assets. These stocks belong to a variety of industries and companies. A well-diversified portfolio can help to minimize investment risks.
  6. Higher returns: In the long term, these funds outperform most investment options. For an investor with a short-term investment horizon, open-ended funds offer the perfect solution.

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Disadvantages:

  1. Vulnerable to large inflows and outflows: A sudden outflow can force a mutual fund manager to sell holdings at rock-bottom prices, causing a loss to all unitholders in the fund.
  2. Carry market risk: The NAV of an open-ended fund fluctuates every day due to stock market volatility. Thus, one must cautiously invest in open-ended funds.
  3. Too much liquidity: Since there is no lock-in in the case of open-ended funds, investors may be tempted by greed to invest more money in bull markets and may redeem units in volatile conditions owing to fear.
  4. Exit loads: These are charges levied upon you if you exit the fund within certain predefined time periods, typically up to 1 year. Thus, the ultimate earnings from an open-ended fund get reduced if it attracts capital gains tax.

Author: Mahek Medh

About the Author: Currently, I am in my second-year bachelor’s program and over the period of time I have realized that I enjoy learning about numbers and money, and I find topics of Finance to very interesting thus this is the domain and space where I wish to etch my long term career.

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