Open Ended Mutual Funds: How Does It Works

6 mins read
by Angel One
Open-ended mutual funds allow investors to buy or sell units of the fund at any time based on the prevailing Net Asset Value (NAV). Let’s learn more about these.
An open-end fund is a mutual fund that can issue any number of new units. In contrast to closed-end funds, they do not have a set number of shares, and additional units may be issued or redeemed in response to investor demand. This implies that the number of shares in circulation can change based on market demand. Professional fund managers who have the knowledge to choose securities that will produce the best returns for investors often run open-ended mutual funds. These managers will buy a variety of stocks, bonds, or other securities with the money collected from investors. Thereafter, investors receive fund returns according to their ownership stakes.

How do Open-Ended Mutual Funds work?

As discussed above, these funds do not have a fixed number of shares to be issued. Anyone can buy and sell shares at any time. The fund's net asset value (NAV), which is derived by dividing the entire value of the assets by the number of outstanding shares, determines the price of the shares. The NAV will rise when the value of the fund's assets rises, and vice versa. Anytime an investor wishes to purchase or sell shares, the fund will issue or redeem shares in accordance. Investors actually purchase a portion of the fund's underlying portfolio of securities when they purchase shares in an open-ended mutual fund. This enables investors to diversify their portfolios and perhaps earn larger returns than they might by buying individual stocks on their own. The fund manager is in charge of deciding which securities to purchase and managing the portfolio to meet the fund's investment goals. A group of analysts and researchers will normally work with the fund manager to discover possible investments and evaluate their potential risks and returns. Open-ended mutual funds often charge fees to cover administrative costs and costs associated with managing the fund, such as the fund manager's salary and related expenditures. The prospectus for the fund contains information about these costs, which are normally subtracted from the fund's NAV.

Open Ended vs Close-Ended Mutual Funds

Open-ended funds and closed-ended funds are two different types of investment funds. Here's a comparison of their key characteristics:

  1. Trading:

    In contrast to closed-ended funds, open-ended funds are traded at a market price that may be at a premium or discount to their Net Asset Value (NAV), which is determined based on the value of the underlying assets.

  2. Liquidity:

    Whereas shareholders in closed-ended funds can only sell their shares on a stock exchange, where trading volumes may be constrained, and bid-ask spreads may be significant, investors in open-ended funds can purchase and sell shares whenever they want.

  3. Fund Size:

    Closed-ended funds don't change in size unless the fund decides to issue more shares, but open-ended funds can expand or contract in size.

  4. Fees:

    Closed-ended funds may levy upfront fees, such as sales commissions and underwriting costs, which are paid at the time of the IPO, but open-ended funds often charge continuing fees, such as management fees and administrative costs.
Also Read Difference Between Open Ended and Close Ended Mutual Funds

How to invest in Open Ended Mutual Funds?

Here are a few steps to invest in Open Ended Mutual Funds.

  1. Determine your investment goals and risk tolerance:

    Determine your investment objectives and risk tolerance before investing in any mutual fund. Take into account how much you can invest, for how long, and what kind of return you're after.

  2. Research mutual funds:

    Once you've determined your risk tolerance and investment objectives, you can start looking at mutual funds that fit your criteria. Consider investing in funds with a proven track record of great performance, minimal fees, and a sound investment philosophy.

  3. Choose a fund:

    Choose a mutual fund that best fits your investment objectives and risk tolerance after you've reduced your options. Check out previous performance, read about the fund manager and keep an eye out for other dimensions to make the best decision.

  4. Open an account with a brokerage firm or investment advisor:

    You must create an account with a brokerage company or financial advisor in order to invest in mutual funds. This can be done in person or online and normally calls for some basic financial and personal information.

  5. Place your order:

    You can make an order to invest in the mutual fund of your choice once your account is set up. The quantity of money you want to invest and the fund you wish to invest in must normally be specified.

  6. Monitor your investment:

    After making a mutual fund investment, it is crucial to regularly check on your investment to make sure it is functioning in line with your expectations. This can be done by going over your account statements or by often checking the performance of the fund online.

How to redeem open ended mutual funds?

To redeem an open-ended mutual fund in India, you need to follow these steps: Visit the website of the mutual fund company in which you have invested or download their mobile app.
  1. Log in to your account using your credentials.
  2. Select the mutual fund you want to redeem from your portfolio.
  3. Choose the redemption option and the amount you want to redeem.
  4. Confirm the transaction and provide your bank account details where you want the redemption amount to be credited.
  5. Submit the request for redemption.
Once your redemption request is processed, the mutual fund company will credit the redemption amount to your registered bank account within a few working days.  It's important to note that mutual funds usually have a cut-off time for redemption requests, which may vary depending on the type of mutual fund and the time of the day. It's advisable to check with the mutual fund company for the cut-off time before placing your redemption request to avoid any delay.

Conclusion

In conclusion, open-ended mutual funds are a well-liked investing choice for a number of investors since they provide liquidity, convenience, and diversification. The fees and dangers of investing in a certain fund should be carefully considered, as is the case with any investment, in order to select a fund that is consistent with one's investment objectives and risk tolerance. Now that you have learned about Open Ended Mutual Funds, open a Demat account with Angel One and start building your wealth.
FAQs

What are open-ended funds?

Open-ended mutual funds are a form of investment instrument that collects funds from numerous individuals and invests them in a wide range of securities, including stocks, bonds, and other assets. Open-ended mutual funds, in contrast to closed-end funds, do not have a set number of shares and may continuously issue or redeem shares.

How do open-ended mutual funds work?

Shares of an open-ended mutual fund are purchased by investors, and the fund then invests the proceeds in a variety of securities. The price of the shares is based on the portfolio value of the fund and is subject to market conditions. The fund will issue new shares or redeem existing shares as needed to meet demand. Investors may purchase or sell shares of the fund at any time.

What are the advantages of investing in open-ended mutual funds?

Professional management, diversification, liquidity, and convenience are just a few advantages that open-ended mutual funds have. Also, they don't require a minimum investment and are simple to buy and sell.