What is open ended mutual fund?

What is open ended mutual fund?

Mutual funds are financial instruments which pool money from a large number of investors and invest them in different securities (e.g. stocks, bonds etc). Investors are allotted units which represent their ownership of the mutual fund scheme’s assets. On a daily basis the AMC discloses the Net Asset Values (NAVs) of all its schemes. NAV is the per unit price at which investors can buy or sell units of their mutual fund schemes.

Types of mutual funds

In terms of structure, there are two types of mutual funds:-

• Close ended funds
• Open ended mutual funds

What is close ended mutual fund?

Close ended funds are mutual fund schemes which have defined maturity periods. Units of a close ended scheme are locked in during the maturity period. Upon maturity of close ended schemes, the redemption proceeds are automatically credited to the investors. Some fund houses may convert their close ended schemes to open ended schemes after maturity, which means investors have the option of redeeming the units at any time after maturity.

What is open ended mutual fund?

An open ended fund means a mutual fund scheme that is open for buying / selling at any time. In other words, you can buy / sell units of open ended fund schemes at any time. There is no maturity period in open ended funds, which means that you can remain invested in the scheme for as long as you want. You can sell units of open ended funds at any time after investing in it.

How to invest in open ended mutual fund?

You can invest in open ended mutual funds during the New Fund Offer (NFO) period and also after the NFO closes. If you invest during the NFO period, you will be allotted units based on par value or face value. If you invest after the NFO subscription period, you will be allotted units based on the prevailing NAVs.

How to redeem open ended mutual fund?

You can redeem units of your open ended scheme at any time based on prevailing NAVs. However, if you sell the units of open ended schemes within the exit load period, then charges may apply. Investors should refer to the Scheme Information Document to understand the exit load structure of a scheme. Investors should note that units of Equity Linked Savings Schemes (ELSS) are locked in for 3 years from the date of investors. You cannot redeem units of ELSS within the lock-in period. After the lock-in period is over, you can sell units of your ELSS at any time, just like any other open ended scheme.

Should you invest in open ended or closed ended funds?

Close ended funds are mutual fund schemes which have defined maturity periods. Units of a close ended scheme are locked in during the maturity period. Upon maturity of close ended schemes, the redemption proceeds are automatically credited to the investors. Some fund houses may convert their close ended schemes to open ended schemes after maturity, which means investors have the option of redeeming the units at any time after maturity.

• Open ended schemes offer high liquidity – you can sell your units at any time, subject to exit loads. Close ended schemes, on the other hand, offer no liquidity before maturity.
• You can invest in open ended fund schemes at any time. On the other hand, you can invest in close ended schemes only during the NFO period.
• You can invest in open ended schemes through Systematic Investment Plans (SIPs). You cannot invest in close ended schemes through SIPs – you can invest only in lump sum during the NFO period.

We discussed what is open ended mutual fund. You should invest in open ended funds according to your investment needs and consult with your financial advisor if required.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.