Mutual funds that keep issuing and redeeming units based on investor demand are known as open-ended funds. Unlike their counterpart, closed-ended funds, there is no limit for open-ended funds to the number of units they can issue. This allows investors to buy or sell units at any time as per the Net Asset Value (NAV).
Benefits of open-ended mutual funds
Open-ended mutual funds offer several benefits to investors. They provide liquidity as investors can buy or sell units anytime without restrictions. Additionally, they offer diversification across various asset classes and investment strategies. Moreover, open-ended funds are actively managed by professionals, relieving investors of the need for active portfolio management.
Drawbacks of open-ended mutual funds
One drawback of open-ended mutual funds is that they may have higher expense ratios compared to other investment vehicles. Additionally, since the fund manager must manage the fund's liquidity, large redemptions may lead to liquidity issues for existing investors.
Who should invest in open-ended mutual funds?
Open-ended mutual funds are suitable for investors seeking diversified investment options with flexibility in liquidity. They are ideal for investors who prefer active professional management of their investments and are comfortable with the inherent risks associated with market fluctuations.
Tax implications for open-ended fund gains
Gains from open-ended mutual funds, too, are subject to capital gains tax. Short-term gains (if units are held for less than one year) are taxed at the investor's applicable income tax rate, while long-term gains (if units are held for more than one year) are taxed at a lower rate. However, tax implications may vary based on the investor's jurisdiction and prevailing tax laws. Moreover, for open-ended mutual funds that invest in equity and debt both, the taxation depends on the equity exposure.
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