What is Open Ended Mutual Fund

An open-ended mutual fund allows investors to buy or sell units at any time, with no restrictions on the number of units available. Units are bought and sold at the Net Asset Value (NAV), which is updated daily. This flexibility makes open-ended mutual funds a convenient option for those who want liquidity and professional fund management.

Advantages of Open Ended Mutual Funds

Highly Liquid

The primary advantage of open-ended mutual funds is their high liquidity. Investors can redeem their units at any time at the current NAV. Unlike investments such as real estate or fixed deposits, which may lock funds for a fixed period, open-ended mutual funds allow investors to access their capital whenever needed.

Performance over Different Market Cycles

Open-ended mutual funds are managed by professionals who make investment decisions based on market conditions. Whether the market is rising or falling, fund managers rebalance the portfolio to minimize risks and maximize returns. This adaptability ensures steady performance even during short periods of market volatility.

Availability of SIP

Open-ended funds support Systematic Investment Plans (SIPs), enabling investors to contribute small amounts regularly. This feature allows individuals with limited capital to invest periodically, level out the average cost per unit, and build wealth gradually. SIPs are especially beneficial for new investors or those unable to invest large sums upfront.

Disadvantages of Open Ended Mutual Funds

High Volatility

Open-ended funds, particularly equity-based ones, are susceptible to market volatility. These fluctuations can result in significant price swings over short periods, which may be unsettling for risk-averse investors, especially during bear markets.

Risk of Large Inflows and Withdrawals

Open-ended funds face challenges from large-scale inflows or withdrawals. When numerous investors redeem their units simultaneously, the fund may need to sell assets quickly, potentially impacting its performance. Conversely, large inflows may make it difficult for fund managers to allocate resources effectively, diluting returns for existing investors.

Cash Flow Risks

Since investors can redeem units at any time, open-ended funds need to maintain cash reserves. This requirement can be challenging, especially for funds heavily invested in illiquid securities or during periods of high redemption requests. Excessive redemptions may force the fund to sell assets at unfavorable prices, affecting returns.

Who Should Invest in an Open-Ended Mutual Fund?

Open-ended mutual funds are ideal for investors seeking flexibility and quick access to their money. They suit long-term investors who want the option to redeem investments anytime. These funds are also a good choice for beginners who prefer professional fund management and diversification without selecting individual securities. Additionally, investors who wish to invest periodically, such as through SIPs, will find open-ended funds convenient and practical.

FAQs

1. How Does an Open-Ended Fund Work?

Open-ended funds allow investors to buy or redeem units at any time based on the current NAV, with no fixed limit on the number of units available.

2. What Is an Example of Open-Ended Funds?

An example of an open-ended mutual fund in Nepal is the NIC ASIA Dynamic Debt Fund.

3. How Is Taxation Applied to Open-Ended Mutual Funds?

In Nepal, individuals investors are taxed 5% on long-term capital gains and 7.5% on short-term gains. Dividends are subject to a 5% withholding tax.

4. What Are the Drawbacks of Open-Ended Mutual Funds?

Open-ended mutual funds can face fluctuating returns due to market volatility, large-scale redemptions, and cash flow risks.