Open-ended Mutual Fund is an investment scheme where the shares can be issued and redeemed at any time. Read more on how it works, who should invest & how to invest.
A mutual fund is an investment option. It involves pooling in money from investors for investment in a variety 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 in the offer document. The profits or losses are shared by investors in proportion to their investments.
A mutual fund must be registered with the Securities and Exchange Board of India (SEBI) before it can collect funds from the public.
On the basis of structures, mutual funds can be classified into two categories: open-ended mutual funds and close-ended mutual fund. Open-ended schemes are available for subscription and repurchase on a continuous basis. There is no fixed maturity period. Investors have the option to buy and sell units at NAV which is declared on a daily basis. The past performance of these assets can be tracked which allows the investor to make a well-informed decision. If the investor is looking for liquidity alone, these funds are a great option.
How do open-ended mutual funds work?
A mutual fund is floated in the market through a new fund offer. In case of open-ended funds, an investor can purchase or sell units of an open-ended mutual fund at any time after the closure of NFO. The NFO is usually open for a maximum period of 30 days. Investment in these funds can be made through systematic investment plans (SIPs) and systematic withdrawal plans (SWPs).
In open-ended mutual funds, units are purchased and sold on demand at the net asset value of the fund. The NAV fluctuates every day based on the prices of the stocks and bonds in the market. There is no limitation on the number of units of the mutual fund that can be issued. There is no set maturity period for these funds. Once an investor redeems the units of an open-ended fund, the units are taken off the market. However, an investor has to pay exit loads for units that are sold within 1 year.
The fund is professionally managed by the fund manager. This scheme is a great option for investors who do not want to actively monitor their investments but are looking at optimal returns.
What are the advantages of investing in an open-ended fund?
Here are the key advantages of investing in these funds
- Access to liquidity: There are no restrictions on the investor to redeem the units of an open-ended fund. This provides access to liquidity to the investors at any time they want. Moreover, the investors can redeem the funds as per the net asset value as on the day of redemption.
- Past performance: Investors of these funds can track the performance of the funds. The historical data available helps the investor take the best investment decision.
- Various systematic options available: These funds allow investors to make use of systematic plans for making investments and withdrawal. The investor can choose from SIPs, SWPs and systematic transfer plans.- Professionally managed plans: There is an experienced fund manager who manages the fund. These managers have the expertise, experience, and resources to make the right investment decision for the investors.
Diversified portfolios: Open-ended funds invest a range of assets. The stocks belong to a variety of industries and companies. A diversified portfolio helps to reduce the risks associated with investments.
- Higher returns: These funds provide better returns in the long run compared to other schemes. For an investor with a short-term investment horizon, open-ended funds offer the perfect solution.
Who should invest in open-ended funds?
Investment in any type of mutual fund depends on the investment objectives of the investor. These funds are best suited for investors who want easy access to liquidity without any restriction. Investment in these funds can also be considered by investors who are looking to diversify their investment portfolios.
In addition to the above, the investor should also meet the standard eligibility criteria laid down by SEBI. As per SEBI, an investor of a mutual fund can be Indian residents above the age of 18, Non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) residing abroad, companies (including public sector undertakings), corporate bodies, trusts (through trustees) and cooperative societies, religious and charitable trusts (through trustees), and private trusts authorised to invest in mutual fund schemes under their trust deeds, foreign institutional investors registered with SEBI, and other individuals or institutions, as approved by asset management companies, so long they conform to SEBI regulations.
How to invest in an open-ended fund?
Investors can invest directly or contact the agents and distributors of mutual funds for necessary information and application forms. Investors must ensure that they invest through the Association of Mutual Funds in India (AMFI) registered distributors and that the distributor has a valid AMFI Registration Number (ARN).
For investments through the direct plan, the investor needs a financial adviser but does not have to pay any commissions to the distributors. This maximizes the returns from the close-ended mutual funds. If the investment is done through a distributor, they are required to disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds out of which the scheme is being recommended to the investor.
Investors also have the option to invest directly in mutual funds either by visiting the mutual fund branch or online through mutual fund websites. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Investors also have the option of using online aggregator websites for making investments in these funds.
Before making an investment, the investor should take into account the track record of the mutual fund/scheme. Investors should also refer to the product labeling of the scheme. As per SEBI regulations, all the mutual funds are required to label their schemes on the following parameters:
a) Nature of scheme – whether the aim is to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term).
b) A brief about the investment objective (in a single line sentence) followed by kind of product in which investor is investing (equity/debt).
c) Level of risk depicted by a pictorial meter as under:
- Low - principal at low risk
- Moderately Low - principal at moderately low risk
- Moderate - principal at moderate risk
- Moderately High - principal at moderately high risk
- High - principal at high risk
Additionally, the mutual fund houses should ensure that product labeling is disclosed in:
a. Front page of initial offering application forms, Key Information Memorandum (KIM) and
Scheme Information Documents (SIDs).
b. Common application form – along with the information about the scheme.c. Scheme advertisements.[BJ6]
Shahid has invested in a debt mutual fund scheme. However, he feels that equity funds are generating better returns. Is it possible for a fund house to change the nature of the scheme from debt to equity?
It is possible to change the nature of the scheme. However, SEBI has laid down certain regulations which need to be complied with for affecting such a change:
Any changes in the fundamental attributes of the scheme such as the structure, investment pattern, etc., can be changed only when written communication is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation. The information should also be published in a newspaper published in the language of the region where the head office of the mutual fund is situated. In case the unitholders do not want to continue with the scheme, they have the option of exiting the present scheme at prevailing NAV without bearing exit load.
I have invested in mutual fund schemes. I want to understand how my investment money has been invested. Where I can get this information?
As per SEBI regulations, every mutual fund has the obligation to disclose full portfolios of all of their schemes on a monthly basis on their website. Portfolio disclosure on a half-yearly basis is published in the newspapers. The fund house can also send the disclosure of half-yearly portfolios to their unitholders.
What is the Net Asset Value of a mutual fund scheme?
The performance of a particular scheme of a mutual fund is indicated by the Net Asset Value (NAV).
NAV represents the market value of the securities held by the scheme. Since the market value of securities changes every day, NAV of the same scheme varies on a day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For instance, if the market value of securities of a mutual fund scheme is INR 200 lakh and the mutual fund has issued 10 lakh units of INR 10 each to the investors, then the NAV per unit of the fund is INR 20 (i.e.200 lakh/10 lakh). NAV is required to be disclosed by the mutual funds on a daily basis.