Explainer: What are 'Open-Ended Mutual Funds', about which RBI expressed concern

The Reserve Bank of India (RBI) has recently expressed concern about 24 mutual fund schemes running in the country. The central bank has said in its report that investors are facing risks while withdrawing money from these schemes. The common thing among them is that all of them are 'open-ended mutual fund schemes'. After all, what are these schemes and why is there risk in them?

At present there are about 300 different mutual fund schemes running in the country. This includes small cap to blue chip mutual fund schemes. Out of these, the Reserve Bank of India (RBI) has expressed concern regarding 24 schemes of 17 mutual fund companies. RBI says that investors may have to face risk while withdrawing money from these schemes. Do you know the common connection between these schemes? All these schemes are open-ended schemes. What are open-ended mutual fund schemes, how are they different from closed-ended schemes and what are the risks associated with them. Let us tell…

First of all, know that RBI has expressed concern about the 24 mutual fund schemes. The common people of the country have deposits of about Rs 1.7 lakh crore in them. Whereas people have deposited Rs 12.5 lakh crore in the total mutual fund schemes running in the country. Due to the increasing trend of technology and new startups in the finance sector, people's investment in mutual funds has increased in recent years.

What is an open-ended mutual fund scheme?

According to SEBI, which regulates the share market, an open-ended scheme is a mutual fund scheme in which investment can be started at any time and money can be withdrawn at any time. There is no maturity period in such mutual fund schemes, however, money keeps coming and going in this scheme, hence the cash flow i.e. their liquidity is quite mild and moderate.

What are closed-ended mutual fund schemes?

The exact opposite of open-ended mutual fund schemes are closed-ended schemes. These schemes have a fixed maturity period. As soon as the maturity of these schemes is completed, the investment and total returns are returned to the investors' account. Some mutual fund companies convert their closed-ended schemes into open-ended schemes on completion of maturity. This gives investors the option to redeem their investment or invest further.

How do open-ended mutual fund schemes work?

Open-ended mutual fund schemes are launched in the market every time as a 'new fund'. Investment in these schemes can also be done through SIP. The special thing about these schemes is that there is neither a time limit nor any investment limit for the investors. Some companies also give investors the option to increase investment in their schemes.

Open-ended mutual fund schemes have many benefits…

These give investors the freedom to invest anytime and withdraw their investment as and when needed. This improves its liquidity.

In these schemes, investors are also allowed to make their own withdrawal plans. If investors wish, they can pay out from it from time to time.

In these schemes, the performance of the fund over the past years can be tracked. This helps investors in taking informed decisions.

Are there risks in open-ended mutual fund schemes?

Actually, investing in the share market is risky in itself. In such a situation, open-ended mutual fund schemes are also not untouched by this. These some risks are often seen in these schemes.

In open-ended schemes, sometimes it happens that a lot of money is invested at once, and sometimes a lot of money is withdrawn at once. In such a situation, the fund manager often has to sell units at low or undesirable prices. This may ultimately cause loss to investors.

Another risk in these schemes is the daily fluctuations in the value of your NAV. These schemes depend to a great extent on daily cash flow, hence they are quite volatile.