What is an open-end fund: A Guide to Mutual Funds with No Limit

Open-end funds offer unparalleled liquidity, with no lock-in periods for the majority of schemes, allowing you to buy or sell units daily at transparent, NAV-based prices.

 To mitigate exposure to market volatility, your money is diversified across a range of assets and managed by professionals in a pool with other investors.

Although you can begin with modest sums (even ₹100), increased management costs and market-related risks necessitate a long-term, well-informed commitment for wealth accumulation. 

A mutual fund that allows investors to buy or sell shares at any time is known as an open-end fund. The fund's share count fluctuates according to investor demand rather than having a set number.

How Does It Work?
 

• To purchase units of the fund, you invest a specified amount of money (for example, ₹5,000).
   
• The Net Asset Value (NAV) of the fund determines its price, and it fluctuates every day.
   
• Anytime you need money, you can sell your units back to the fund.

Example: Amber’s Investment

Amber invests ₹10,000 in an open-end fund. After a year, if the NAV rises, her investment grows. If she needs cash, she can sell her units easily.

Table:

This table introduces you to the Key Features of an open-end fund:
 

This table helps you see why open-end funds are flexible.

Why Choose Open-End Funds?
 

• Easy to enter/exit: no lock-in period.
   
• Diversified: your money is spread across many stocks/bonds.
   
• Managed by experts: professionals handle investments.
   

For beginners who prefer hassle-free investing, open-end funds are an excellent choice. Using straightforward examples, this blog explains how they operate. After learning the fundamentals, let's examine how NAV affects your profits.

Bonus Tip: Units are priced daily based on the Net Asset Value (NAV), which reflects the fund’s total assets minus liabilities.

What Are the Key Characteristics of Open-End Funds?

Open-end funds are mutual funds that do not have a fixed number of shares. They continuously create or cancel units based on investor demand, offering easy entry and exit. Open-end funds have some key features that are:

Example:

In this section, we’ll break down the key features of open-end funds in simple terms, using the example of Akash, who invests ₹50,000 in a mutual fund. By the end, you’ll understand why these funds are so convenient.

1. Continuous Issuance and Redemption
 

• You can buy new units whenever you invest.
   
• You can sell (redeem) units back to the fund at any time.
   
• Example: Akash invests ₹50,000 today, and the fund creates new units for him. If he needs money next month, he can sell some units.

2. NAV-Based Pricing
 

• The price of each unit is based on the Net Asset Value (NAV), calculated daily.
   
• NAV = (Total Fund Value – Expenses) / Total Units
   
• Example: If NAV is ₹25, Akash gets 2,000 units (₹50,000 ÷ ₹25).

3. No Fixed Maturity Date
 

• Unlike FDs or bonds, open-end funds do not have an end date.
   
• You can stay invested for years or withdraw partially at any time.

4. High Liquidity
 

• Most funds process withdrawals within 1-3 working days.
   
• Example: Akash needs ₹20,000 urgently; he sells 800 units (if NAV is ₹25).

5. Flexibility
 

• No lock-in (unless it’s a tax-saving ELSS fund).
   
• You can increase, decrease, or stop investments at any time.
   

6. Diversification
 

• Your money is spread across multiple stocks/bonds, reducing risk.
   
• Example: Akash’s ₹50,000 is invested in 50+ companies, not just one.

Table:

This table shows you a Comparison of Open-End Funds vs. Other Investments:
 

This table helps you see why open-end funds balance safety, returns, and convenience.

Open-end funds are simple, flexible, and liquid, making them ideal for building wealth over the long term without requiring you to lock up your money.

The example of Akash demonstrates how to invest, grow, and take money out as needed. Now that you know the key features, let’s dive deeper into How Open-End Funds Work.

Bonus Tip: Returns are subject to capital gains tax: short-term (held <1 year) taxed at 15%, long-term (held >1 year) at 10% over ₹1,00,000.

How Open-End Funds Work? 

Open-end funds work like a shared investment pot where many investors pool their money together. These funds allow you to buy and sell directly through the fund company at transparent prices, in contrast to stocks that trade on exchanges.

Let's understand how this works through Aman's ₹25,000 investment journey.
 

The Working Mechanism of Open-End Funds

1. Pooling of Investments

Your small investment joins thousands of others to form a powerful, professionally managed fund.
 

• Your money combines with other investors' money
   
• Creates a large fund managed by professionals
   
• Example: Aman's ₹25,000 joins ₹100 crore from other investors
   

Together, we achieve scale, expertise, and opportunities far beyond individual reach.

2. NAV Calculation (Daily Pricing)

NAV measures the actual value of each unit in a fund.
 

• NAV = (Total assets - liabilities) ÷ Total units
   
• Calculated at market close each day
   
• Example: If NAV is ₹50, Aman gets 500 units (₹25,000 ÷ ₹50)
   

It ensures fair pricing and transparency for all investors daily.

3. Buying and Selling Process

Mutual funds create or cancel units based on investor actions.
 

• Buy: Fund creates new units when you invest
   
• Sell: Fund cancels units when you redeem
   
• Example: After 1 year, Aman sells 200 units when the NAV reaches ₹60 (gets ₹12,000)
   

This process ensures liquidity and fair value for every transaction.

4. No Fixed Maturity

Mutual funds offer flexible, open-ended investment with no fixed term.
 

• No end date like FDs
   
• Can stay invested as long as you want
   
• Example: Aman keeps 300 units for future growth
   

You control your timeline, staying invested for long-term growth potential.

Table:

This table shows investment flow in Open-End Funds:
 

This table shows the complete lifecycle of an open-end fund investment.

Open-end funds provide a structured yet flexible way to grow your money. You can enter, exit, or remain invested based on your needs, as shown by Aman's example. The daily NAV system ensures fair pricing for all investors.

Advantages and Disadvantages of Open-End Funds

Open-end funds allow you to easily buy or sell units at any time, offering great flexibility and liquidity. Please note that they may have higher fees and can be affected by large withdrawals during market downturns, which may impact their performance.

Table:

Key benefits and drawbacks of open-end funds are summarised.
 

Open-end funds offer accessibility but require awareness of fees and risks.

Conclusion
 

Open-end funds are flexible investment accounts that allow you to contribute or withdraw money as needed. They offer several advantages: your investment grows with the market, you are not locked in, and your money is professionally managed.

These funds simplify investing for everyone, whether you're saving for a significant goal or just looking to grow your money safely.

Although the value may fluctuate daily, these funds can help you build wealth over time. If you're new to investing, consider starting with a small amount and gradually increasing your investment over time. Enjoy your investment journey!

FAQs

Why are management fees higher?

Fees cover professional management, administrative costs, and regulatory expenses, impacting overall returns.

How do I benefit from diversification?

Your investment is spread across multiple assets (stocks/bonds), reducing risk compared to investing in a single company.

Can I start with a small amount?

Yes, you can invest with as little as ₹100-₹500 in many open-end funds, making them accessible to beginners.

Are there any lock-in periods?

Most open-end funds have no lock-in period, except for tax-saving schemes like ELSS, which have a 3-year lock-in.
 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.