Mutual funds come in three forms of structure-open ended funds, closed ended funds, and interval funds. Of the three, Open Ended Funds have been the most popular among investors as one can buy and sell units easily.
This series will discuss Open Ended Funds-types, advantages, and what aspects to look out for a while selecting investments through Open Ended Funds in India.

What Are Open Ended Funds?

Open Ended Funds, are open-end mutual fund schemes, which allow the investors to buy and sell the units at any given time. These are distinguished from closed-ended funds because these funds are not traded on the stock exchanges and there is no limit on the issue of units.

The NAV of an open-ended fund changes daily with market trends and the performance of underlying securities. These funds do not have a maturity period, giving investors the freedom to invest or exit as per their needs.

Advantages of Open-Ended Funds

1. Liquidity Management

Investors can buy or sell units on any business day at the current NAV.

Unlike fixed deposits or other long-term investments, open-ended funds allow the investor to withdraw money at any point in time when needed.

2. Performance Over Market Cycles

Historical performance data is available, so the investor understands how the fund has reacted to market trends over time.

This enables better decision-making and long-term investment strategies.

3. Option

Investors can start investing with small amounts through SIP, which makes it ideal for salaried individuals.

SIP investments in open-ended funds enable the gradual increase of wealth, reducing the market volatility impact as well.

4. Active and Passive Investment Strategy

Open Ended Funds comprise two types: one is active in which the investment managers choose equities after in-depth research; the other one is passive – an example would be an exchange traded fund that follows an index.

Investors can opt between these strategies on the basis of their risk and financial objectives as well.

Limitations of Open Ended Funds

1. Market Volatility

Since these funds are tied straight to the stock market, they become susceptible to daily price fluctuations.

Extreme market declines decrease the NAV and, therefore affect returns.

2. Flow Risks

When investors withdraw large amounts, fund managers must sell assets at unfavorable prices.

Such action may hurt a fund’s overall performance for all investors.

3. High Inflows and Outflows

Unlike closed ended funds, open ended schemes face frequent buying and selling of units which may pose challenges in liquidity management.

Who Should Invest in Open Ended Funds?

Open Ended Funds are suitable for a variety of investors, including:

• Beginners – Ideal for those new to investing, as they offer easy entry and exit options.
• Long-Term Investors – Best for individuals with a long-term financial horizon who can withstand market fluctuations.
• Salaried Individuals – SIP plans help invest on a regular basis without a lump sum requirement.
• Diversification-seeking Investor – These funds provide exposure to asset classes and therefore reduce the overall risk.

Taxation of the Gains of an Open Ended Fund

Taxation is dependent on the asset allocation of the fund

Equity-oriented Funds (65% or more investment in equities)

• Short-term capital gains if held < 1 year Treated at 15%
• Long-term capital gains (holding > 1 year): Taxed at 10% (for gains above ₹1 lakh)

Debt-Oriented Funds (Investing 65% or more in bonds):

• Short-term capital gains (holding < 3 years): Taxed as per investor’s income slab
• Long-term capital gains (holding > 3 years): Taxed at 20% with indexation benefits

Investors must look at the asset allocation of the fund before investment to understand which tax frame this will fall under.

Conclusion

Open-ended funds are perfect for investment options, which do not compromise your liquidity while keeping the wealth in a growing curve. Whether it is an active fund for you or an ETF for passive investing, these funds help you cater to a range of financial objectives.

But prior to investing in such funds, it is imperative to understand the market trends and how to handle liquidity. All investments should align with your financial goals and risk appetite.