Did you know that majority of the mutual funds are open-ended?
Hence it becomes extremely important to understand Open-Ended Mutual Funds.
Open ended mutual fund is a collective investment scheme which can issue and redeem shares at any time. The price at which the shares are issued in an open-ended mutual fund can be redeemed depending on the proportion to the net asset value. Hence, it reflects the fund’s performance.
The open-ended mutual funds provide the investors with an easy and low-cost way to pool the money and buy a diversified portfolio. Also, the investors do not need a lot of money to gain entry into an open-ended mutual fund. Since these funds allow to buy and sell units on a continuous basis the investors can enter or exit anytime they want. The units can be purchased after the initial offering period. The units are bought and sold at the Net Asset Value declared by the fund. The reason for the varying of these funds is quite simple. The number of outstanding units goes up or down each time the fund house sells or purchases the existing units.
An open-ended fund is not obliged to keep selling new units all the time. But, it has to repurchase the units all the time.
Unlike the open-ended funds, an investor cannot buy the units of the close ended funds after the initial offering is over. This means the new investors cannot enter and old investors cannot exit until the end of the term. To exit before the term, the fund house provides a platform and lists the close-ended schemes on the stock exchanges.
A key difference between the open ended and close ended mutual funds is that the outstanding shares of the open-ended funds can vary each day whereas in close ended funds the number of shares is fixed.
In India, till 1994, most funds offered were closed ended funds. But due to the lack of some features, these funds suffered their popularity. For example, there was a heavy discount on the NAV and illiquidity due to lack of buyers in the secondary market. Hence, the open-ended mutual funds were introduced.
They did not become popular and received a mixed response from the investors. The investors began to think of open-ended mutual funds were just a closed-ended fund in a new packaging. To counter this, the mutual fund industry launched no load funds.
The open-ended structure allows you to invest through SIP - Systematic Investment Plans. This is useful if you have built a huge capital over a period of time with small contributions. SIP also allows from cost averaging. Besides, you do not have to worry about the market’s highs and lows. The open-ended mutual funds also allow a Systematic Withdrawal Plan (SWP). This lets an investor exit at pre-determined intervals.
The Open-Ended Mutual Funds allows changing your holdings in the same fund family anytime. It also allows getting rid of poor performers in the portfolio. Below are some of the advantages of Open Ended Mutual Funds
The open-ended mutual funds are liquid. You can redeem them at any time. When you show your sell order, the fund liquidates the shares at the end of the next business day and within a few days, you get your money.
You can manage your mutual funds by picking stocks and bonds with online broking firms. Yet, it can prove to become time-consuming if you are managing your own money. Hence it is always good to appoint a fund manager.
Now that you know the difference between open ended and close ended mutual funds, selecting one among these two types of mutual fund becomes a lot easier!