Open Ended Mutual Funds: Meaning, Taxation, Pros and Cons
10 September 2024
8 min read
00:00 / 00:00
Mutual funds provide an attractive alternative to traditional savings accounts, particularly open ended mutual funds, for growing one's wealth. Further, it provides higher returns with the freedom to access your money as and when required.
Basically, mutual funds are structured into three major types: open ended, closed-ended, and interval funds. Among these, open-ended mutual funds are the most extensive and popular choice among investors.
In this article, we will go in-depth and explore open ended mutual fund meaning, the types available in India, their benefits, and other additional information. So let's get started!
What is an Open Ended Mutual Fund?
Open ended funds are one of the popular types of mutual funds in India. They pool investors' money into a diversified portfolio of stocks, bonds, or a combination of both. These funds don’t have a lock-in period and issue unlimited mutual fund units to investors. Thus, investors can buy or sell the units in any quantity at any time.
The underlying portfolio determines the Net asset value (NAV) of these funds and it changes daily based on the portfolio performance. These funds are not traded in exchange. So investors have to buy shares directly from the fund itself.
How does an Open Ended Mutual Fund Work?
The open ended mutual fund just works like any other mutual fund. It allows investors to buy or sell units at any time and it doesn’t have a fixed maturity period like closed-ended funds. Here, the value of each unit is derived in terms of NAV which keeps fluctuating based on the performance of the underlying assets in which the fund house invests in.
Professionals manage it and invest the funds in diversified portfolios such as stocks, bonds, etc and the returns are based on the performance of the underlying assets. Thus it makes one of the best options for those seeking flexibility and liquidity.
Open ended mutual funds can keep offering unlimited units to investors since it doesn’t have a fixed number of units. Therefore, the total assets of the fund will increase when new investments are made and decrease when redemptions occur.
Although the value of total assets keeps increasing or decreasing based on the buy and sell activity of the investors in the particular mutual funds, it should be noted that it only impacts the total assets held by the fund house and does not have any impact on the NAV of those funds.NAV is nothing but the price of the unit of mutual funds.
Read our latest blogs “How Mutual Funds Work” and “Mutual Fund Houses in India” to learn more about mutual funds!
Pros and Cons of Open Ended Mutual Funds
Pros:
No Fixed Maturity: Allows long-term investments without a fixed maturity date.
Liquidity: Easy to buy or sell shares anytime, ensuring quick access to money.
Diversification: Spread across various assets, reducing investment risk.
Professional Management: Managed by experts who make investment decisions on your behalf.
Cons:
Market Risk: Investment value may fluctuate due to market conditions.
Fees: Management fees and other charges can reduce returns.
Variability in Performance: Returns depend on the fund manager's decisions, which may not always be favorable.
Exit Load: Some funds may charge a fee if you exit within a specific period.
Difference Between Open Ended and Closed Ended Mutual Funds
Aspect | Open Ended | Closed Ended |
Liquidity | open ended funds provide high liquidity to investors and allow them to buy and sell units at anytime | Closed-ended funds have no liquidity due to their fixed lock-in period for the investment. |
Transparency | It allows investors to scrutinize and track the performance of the fund | It is less transparent compared to open ended funds and they don’t allow investors to track their performance on a regular basis. |
Investment amount | You can invest in these funds generally starting from Rs.500 to Rs.1000 | A minimum of Rs.5,000 is required to invest in a Close-ended NFO |
Flexibility | Investors can invest in flexible amounts as it offers both SIP and lumpsum methods to invest in their fund | Closed-ended funds only have the option to invest during the New fund offer (NFO) period. |
Rupee cost averaging | You can benefit from Rupee cost-averaging since it allows SIP investment option | No averaging benefit is available to investors since they don’t allow investors to invest post the NFO period |
List of Best Open Ended Mutual Funds
This data is taken from the Rupeezy Invest app, you can explore top-performing mutual funds through our app which provides comprehensive investment insights through various educational blogs and articles
Fund names | Type of fund | CAGR Returns over 5 years | 5Y Risk | AUM in Rs.Crs |
Quant Flexi Cap Fund - Direct (G) | Equity - Flexi Cap | 37.48% | 20.43% | 7,710 |
Motilal Oswal Midcap Fund - Direct (G) | Equity - Mid-cap | 35.61% | 20.70% | 14,446 |
JM Value Fund | Equity - Value | 30.58% | 20.36% | 1,054 |
Quant Focused Fund - Direct (G) | Equity - Focused | 27.89% | 19.28% | 1,145 |
Quant infrastructure Fund - Direct (G) | Equity - Sectoral | 40.42% | 23.82% | 3,991 |
ICICI Pru Dividend Yield Equity Fund - Direct (G) | Equity - dividend Yield | 28.94% | 17.97% | 4,642 |
ICICI pru Corporate Bond Fund - Direct (G) | Debt | 7.20% | 1.43% | 26,907 |
Bandhan CRISIL IBX Gilt April 2028 Index Fund - Direct (G) | Debt - Index | 5.50%(3 Year returns) | 2.15 | 4,940 |
HDFC Balanced Advantage Fund - Direct (G) | Hybrid - Dynamic asset allocation | 22.50% | 16.56% | 9,4048 |
ICICI Pru Equity & Debt Fund - Direct (G) | Aggressive Hybrid | 24.58% | 15.82% | 39,091 |
Note: These funds are chosen based on their return over the past 5 years and the data drawn are as of September 9th, 2024. Investors are advised to do their own research before investing in any of the funds.
Taxation in Open Ended Mutual Fund
Except for some Equity-linked Savings Scheme (ELSS) and some retirement schemes, Mutual fund gains are taxable under section 80C of the Indian income tax. In the case of open ended mutual funds, the tax rate varies based on the holding period and the percentage of investment made on equity and debt instruments.
Tax on Equity Funds
Mutual funds that invest more than 65% of their fund in Equity instruments are called Equity mutual funds. In case you sell Units of Equity Mutual Fund within 1 year, the capital gains are short-term and taxed at 20%.
If you invest in units of an equity mutual fund for more than 1 year, the gains will be long-term. Under this situation, LTCG up to ?1,25,000 for a financial year is exempted from tax. Gains above ?1 lakh will be charged an LTCG tax of 12.5% with no indexation benefit.
Tax on Debt funds
Mutual funds that invest more than 65% of their fund in debt instruments are called debt mutual funds. In the case of debt mutual funds, funds that primarily invest in bonds, if you sell units within 3 years, the gains are considered short-term and taxed as per your income tax slab rate.
Debt Funds: In the case of debt mutual funds held for more than 3 years, the gains are long-term and taxed at 20% with an indexation benefit that adjusts for inflation.
Also Read: Difference Between Equity and Debt
Who Should Invest in Open Ended Mutual Funds?
Open-ended mutual funds will serve the needs of different kinds of investors. If you are looking to create wealth, Equity funds are best suited as these funds have the potential for high returns as they invest in the stock markets. If you are a conservative investor looking for regular income, debt funds are best suited for you as these funds assure stability of return with regular income from fixed income. Hybrid funds are a mixture of both. So it is suited for investors who want both characteristics of equity and debt.
The open-ended funds also offer high liquidity and, therefore, can be used for investors requiring quick access to their money. You may even find options that best suit your requirements, be it for regular plans of investment. Overall, these funds fit different levels of risk and financial goals and hence can be regarded as one of the most versatile investments. However, investors are advised to do research that aligns with their financial goals.
Conclusion
Wrapping it up, open ended mutual funds offer flexibility, liquidity, and steady growth to the investor. Unlike a closed-ended fund where the number of outstanding shares is fixed and gets traded on the stock exchange, in an open ended fund, there is free entry and exit at the will of the investor.
While both types of funds have their respective sets of advantages and disadvantages, the open ended kind is more suitable for those desiring continuous investment opportunities with easy access to money.
The levy of taxation depends on the period for which the open ended mutual funds are held and also the fund type. This product would be well-suited to those investors looking at long-term growth, regular income, and diversification without the hassle of any lock-in periods. Be it a new investor or one who wants to grow his portfolio, open ended mutual funds offer an all-in-one package for investment.
Consider Rupeezy to explore various types of mutual funds and visit Rupeezy blog site for more exciting content related to finance and the stock market.
