Understanding open ended mutual funds: A guide to how they work

Introduction 

In the vast sea of investments, investors find open ended mutual funds as a comparatively flexible option. Unlike its counterpart, closed end funds, open ended mutual funds provide investors with a more approachable and detailed strategy to invest their money.

But what exactly are open ended mutual funds and how do they work? Let’s understand them from a basic level. 

What is an open ended fund?

An open ended mutual fund according to experts is a dynamic and flexible investment option, offering a diverse portfolio of combined investor money. An important feature of open ended funds is that investors can issue an unlimited number of shares from the fund. This process is handled by the fund sponsor(fund owner) by directly selling shares to investors and redeeming them when needed. 

An investor in this type of setting can buy and redeem funds flexibly on any working day. This give and take is done at the existing Net Asset Value (NAV) of the fund, thus keeping the pricing process transparent for newbie investors. 

Another important thing to remember is that open ended funds do not come with a maturity period. Thus, investors are not bound by a fixed timeline and can stay invested in the fund for as long as they desire.

Hence, when people discuss “mutual fund,” they are usually referring to open ended mutual fund. As these funds provide unlimited shares, direct transactions, and daily pricing, they are often loved by every investor. 

How does an open ended fund work?

Understanding how an open ended mutual fund works is quite crucial for investors. So here’s an easy-to-follow breakdown to understand them better- 

Continuous unit offering 

An open ended fund is quite popular because it is always open for investment. It keeps on issuing new units as long as there are buyers interested in the fund. This annual availability is the defining feature, giving it its name of “open ended fund.”

Net Asset Value (NAV)

Shares of an open ended mutual fund are bought and sold at their Net Asset Value (NAV). To explain it simply, Net Asset Value (NAV) is the per unit market value of all the investments held by a mutual fund scheme divided by the total number of units held by the investors in that scheme on a particular date. 

Handling unit redemptions

If a huge number of shares are redeemed/sold by the investor, the fund sponsor may need to sell some of its initial investments to generate the necessary money required for repaying the sold shares. This approach of open ended funds helps them to maintain liquidity to meet investor redemptions.

Closure to new investors

In certain situations, when the fund’s management believes that its total assets have exceeded to effectively carry out its aforementioned objectives, the fund is closed for new investors. Doing this helps maintain the fund’s operational efficiency.

Difference between open end funds and closed end funds

Analysing the overall differences between open end funds and closed end funds helps us understand that open ended funds are way better investment options than its counterpart.

Benefits of open ended funds

After understanding the difference, let’s move on to the benefits that make open ended mutual funds an ideal investment fund. 

1. Diverse Portfolio 

Open ended mutual funds offer investors a diverse portfolio of shares to invest in, with a much smaller quantity. This helps to spread investor’s risk and enhance their investment stability. 

2. Liquidity

In open ended funds investors benefit from easy liquidity, allowing them to withdraw their investments anytime without any delay or difficulty. This feature appeals to investors who want their holdings to be a secure and accessible investment.

3. Professional Management

All open ended funds are managed by experienced professionals who make investment decisions based on in-depth research and analysis. Professionally managed funds hence give better returns compared to individually managed portfolios.

4. Maturity Period

A crucial advantage of open ended mutual funds is the absence of a fixed maturity period.

5. Affordability

In an open ended fund investors can start with a relatively small amount of investment as they even provide fractional shares. This affordability makes them accessible to a wide range of investors. 

6. Transparency

An open ended fund maintains transparency by disclosing their holdings and performance regularly. This commitment provides investors with vital information to make calculative decisions about their investments.

Some popular open ended funds in India

Now that we know about the ins and outs of mutual funds, let’s know some of the popular open ended mutual funds in India. 

Conclusion 

To conclude, an open ended mutual fund is a dynamic investment option where investors can continuously buy or sell units according to their requirements. With features like professional management and the absence of a fixed maturity period, these funds cater to various investor preferences making them a popular investment choice today! To know more, subscribe to StockGro blogs. 

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