Online mutual funds are a popular investment avenue for investors looking to grow their wealth. But there are too many different types of mutual funds available, it can be confusing to understand the differences between them.
One such type of mutual fund is the open-ended mutual fund, which allows investors to buy and sell units at any time based on the current Net Asset Value (NAV) of the fund. If you are new to this space, don’t worry.
This article aims to provide a comprehensive overview of what is an open end fund, how it differs from a closed end fund, and other relevant information to help you understand this investment option better.
What is an Open-Ended Mutual Fund?
An open-ended mutual fund is a type of mutual fund that allows investors to purchase/sell units of a fund at any time without restrictions. Just like a company goes public to get its shares publicly listed, an open-ended fund enters the market via a New Fund Offer (NFO).
Much like an IPO, potential investors must apply for NFO and the AMC eventually allots units to them based on various criteria. The open-ended fund is available for everyone after the NFO period closes, meaning investors can enter and exit the fund at will.
Unlike closed-end funds, which have a fixed number of units available for purchase, open-ended funds do not have a set limit on the number of units available.
This allows the fund to adjust to changes in demand and supply and maintain its liquidity. In fact, liquidity is one of the biggest highlights of investing in open-end funds. We’ll talk about this benefit later on in this blog.
Investors can buy and sell units of an open-end fund at the current market price, which is determined by the mutual fund’s NAV.
You could say that open-ended mutual funds are much more common than closed-ended funds. That’s why most investors do not know the difference between the two types of mutual funds.
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Benefits of Investing in Open-Ended Mutual Funds
Here are a few benefits investors can get by investing in open-ended funds.
1. Affordability and Transparency
Open-ended funds often have lower minimum investment requirements compared to other investment vehicles, making them accessible to a wider range of investors.
Additionally, open-ended funds are mutual funds which means they are required to provide regular updates on their holdings and performance, offering investors greater transparency and accountability.
As open-ended mutual funds are constantly issuing new units and allowing redemption of existing ones, they offer greater liquidity compared to closed-end funds.
This means that you can buy and sell units at any time without having to wait for the fund to re-open for subscription, which is the case with close-ended funds. In some instances, there are fees involved known as a mutual fund load.
Liquidity is very important when it comes to any investment as it dictates how soon you can convert the investment into cash.
One of the main advantages of investing in open-ended mutual funds is the opportunity to diversify your investment portfolio.
4. Professional Management
Another advantage of investing in open-ended mutual funds is that professional fund managers manage them.
These managers have the expertise and resources to carefully select the securities in the fund and manage the portfolio in line with the fund’s investment objective.
Fund managers work for AMCs. The following video covers the biggest AMCs in India:
5. Ease of Investing
Investing in open-ended mutual funds is a convenient option for individuals to purchase or sell units as per their needs and preferences. Investors can use an online mutual fund investment platform, go to banks, or visit the AMC website.
Difference Between Open-Ended Funds and Closed-End Funds
One of the main differences between open end fund vs closed end fund is the way they are structured.
Closed-end funds have a fixed number of units, which are traded on stock exchanges just like individual stocks. The overall demand determines the value of these units, and they may trade at a premium or discount to the NAV of the fund.
On the other hand, open-end funds are constantly issuing new units to accommodate new investments and redeem existing units, which is why they do not have a fixed number of units.
This structure allows the fund to maintain its liquidity and ensures that the NAV is always reflective of the current market value of the securities in the fund.
Investing in open-ended mutual funds can provide investors with a convenient and effective way to grow their wealth over a period of time. With its several advantages, open-ended funds are a popular investment option for achieving financial goals.
However, it is essential to carefully consider a fund’s investment objectives, strategies, and past performance before investing to make an informed decision.
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