What is an open-ended mutual fund? Why invest in them?

Investing in mutual funds is the best way to proceed if you are looking to multiply your wealth. If selected properly, a mutual fund can offer triple than what a fixed deposit offers.

Open-ended mutual funds are a type of mutual fund that you can invest in. You don’t need a lot of capital to invest in an open-ended fund, unlike their counterparts closed end funds.

What is an open-ended fund?

Mutual funds that do not place any restrictions on the number of shares it can issue are known as open ended mutual funds. Most of the mutual funds that you will come across on the market are open-ended in nature. However, if the fund manager feels that any more expansion of the fund will hinder it from attaining its stated objectives, then the fund will not accept new subscribers or issue new shares.

Open-ended mutual funds invest in bonds and equities. These investments are then consolidated as units, which are then sold to the investors of the fund. The value at which it is sold is called the net asset value (NAV). The NAV varies according to a fund’s securities and is determined at the end of every trading day.

Owing to its nature, an open-ended fund can make new investments to create new units. This is an easy method for investors to pool money and purchase units from a diverse portfolio to meet a specific objective like income and growth.

Open-ended funds have sufficient monetary reserves to cater to redemptions. An investor can sell his or her units to the fund house to redeem it.

Why should you invest in open-ended mutual funds?

An open-ended fund gives you greater flexibility in purchasing and selling units. Through this fund, you can directly invest in the market without any intermediary. The units are also cheaper compared to closed-ended funds.
These funds are very liquid in nature meaning you can redeem the units anytime. Also, when you buy units of an open-ended scheme, you will be purchasing at the NAV determined on the previous trading day. This method takes out fluctuations in NAV prices during purchase.

To sum it up, these funds are suitable if you are starting out with a small capital. There is a wide variety of funds in the market so take your pick after evaluating your requirements.