Mutual Fund is a kind of investment tool which helps individuals to make money in the long run. A mutual fund has a particular theme or strategy. Investors who are beginners may find things little complicated in the starting phase, but as they proceed, they will get a hang on it. Investment in a mutual fund can either be done through online or offline mode or via an independent financial advisor or mutual fund distributor or a broker.
There are many terms associated with mutual funds, one such term is Open-Ended Funds. Let's understand its meaning in brief.
What is an Open-Ended Fund?
An Open-Ended Fund is a diversified portfolio of pooled money from an investor which can issue an endless number of shares. Here the fund sponsor sells equities directly to investors and even redeems them. The open-ended mutual funds are open for investment at any time. These funds offer liquidity to investors as units can be purchased and sold freely.
Usually, units are bought and sold based on their net asset value (NAV).
The open-ended funds do not have any restrictions on the total number of units they can issue. Whenever an investor invests their money in these funds, more units of an open-ended fund get created. In the same way, whenever, an investor redeems their units (open-ended fund), the mutual fund units are taken out of circulation.
These funds allow investors to make use of the Systematic Investment Plans which are popularly known as SIPs, Systematic Transfer Plans (STPs), Systematic Withdrawal Plans (SWPs).
Key Takeaways from Open-Ended Funds
- An open-ended fund is an investment tool which uses pooled assets for ongoing new contributions and withdrawals from the pool of investment made by investors.
- An open-ended share is not traded in stock exchanges and will be priced at their portfolio's net asset value (NAV) daily.
- Open-ended funds have an unlimited number of possible numbers of outstanding shares.
- Some of the exchange-traded funds and mutual funds are both types of open-ended funds.
Pros of Open-Ended Funds
The open-ended funds are highly liquid as they allow investors to redeem fund units any time (whenever they want). These fund units are redeemed based on the net asset value (NAV) of the day when the units are redeemed.
The open-ended funds give more freedom for an investor to change an investment proposition.
Good Track Record
The track record of open-ended funds spanning across different market cycles are available widely and this helps investors to make a detailed analysis thoroughly before arriving at a final decision.
Investing in open-ended funds will allow investors to make use of systematic plans for investment as well as for withdrawal purpose. An investor requires open-ended funds to park their money in systematic investment plans, systematic withdrawal plans, systematic transfer plans.
Cons of Open-Ended Funds
Open-ended funds are vulnerable to large inflow and outflows. A swift outflow of funds can force the mutual fund manager to sell the holdings at rock - bottom rates, leading to loss to all the other unitholders in the fund.
The open-ended funds come with exit load charges. These are the charges which will be levied on if an investor exits the fund within a predefined time (less than up to 1 year).
The high liquidity offered by these funds is a drawback as there is no lock-in in case of open-ended funds, which may force investors by greed to invest more money in it and when the markets turn volatile, investors will be forced to redeem their units owing to fear of loss.
Open-ended funds carry a certain level of market risks with them. The NAV of the open-ended funds does oscillate every day due to volatility of the stock markets. The need for caution is required while investing in these funds.
Who should opt for Open-Ended Funds?
Investors who prefer to invest in liquid investments and are willing to undertake market risk can go for open-ended funds as these funds are suitable for them.