Open-ended fund
Also written Open ended scheme · Open-ended scheme · Open-ended mutual fund
A mutual fund scheme with no maturity date that keeps selling and redeeming units directly after its NFO, at NAV-linked prices, so its number of units and unit capital change every day.
In plain language
An open ended fund is a scheme whose door never shuts. It gets its name, in the workbook's words, from the fact that it does not have a maturity date.
Units are offered for the first time in the new fund offer. After that, anyone can buy fresh units from the fund, and anyone holding units can sell them back to the fund, on a continuous basis — at the AMC's offices, at investor service centres, or through stock exchange terminals where that facility exists.
Because the fund itself is the buyer and seller, the investor never needs to find a counterparty. That is why the workbook calls the structure highly liquid, and why the registrar's work on an open ended scheme never stops: every purchase creates units and every redemption extinguishes them.
How it works
Three mechanics follow from the fund dealing directly with investors.
The unit count moves daily. Purchases add units; redemptions cancel them. Unit capital — outstanding units multiplied by face value — therefore changes on a regular basis, whereas in a close ended fund it is fixed after the NFO.
Prices are NAV-linked. Purchase and redemption happen at prices based on the scheme's net asset value, not at a market price set by demand and supply. The applicable NAV is decided by the cut-off rules.
Liquidity comes from the fund. In Table 4.1 of the workbook the liquidity provider for an open ended fund is the fund; for a close ended fund it is the stock market. NAV is declared daily, the portfolio is disclosed monthly, and intra-day trading is not possible.
The timelines the registrar works to:
| Event | Turnaround |
|---|---|
| Re-opening for ongoing sale and repurchase after the NFO (other than ELSS) | Within 5 business days of allotment |
| Dispatch of redemption proceeds | Within 3 working days of the request (5 business days for overseas funds) |
| Delay in redemption or dividend payment | 15% p.a. penal interest, paid by the AMC |
The exit load of an open ended scheme shall not exceed 3 percent of NAV. And like every scheme, it must keep at least 20 investors, no single investor above 25 percent of AUM, and AUM of not less than Rs 20 crore on a continuous basis.
The formula
Unit capital = Units outstanding × Face value per unit
Units issued = Amount invested ÷ Applicable NAV
Units redeemed = Amount redeemed ÷ Redemption price
Redemption price = NAV − (Exit load % × NAV)
A worked example
Illustrative numbers, ignoring stamp duty for clarity.
An open ended equity scheme of face value Rs 10 has 5 crore units outstanding at the start of a day, so its unit capital is Rs 50 crore. The day's NAV is Rs 24.00.
| Transaction | Working | Units |
|---|---|---|
| Purchases of Rs 12 crore | 12,00,00,000 ÷ 24 | +50,00,000 |
| Redemptions of Rs 4.8 crore | 4,80,00,000 ÷ 24 | −20,00,000 |
| Net change | +30,00,000 |
Closing units: 5.30 crore. Closing unit capital: 5.30 crore × Rs 10 = Rs 53 crore. Nobody traded with anybody else; every unit was created or cancelled by the fund.
One of those redeeming investors, Mrs Kulkarni, sold back 2,000 units in a scheme carrying a 1 percent exit load:
Redemption price = 24.00 − (1% × 24.00) = Rs 23.76
Proceeds = 2,000 × 23.76 = Rs 47,520
The registrar must pay that to her verified bank mandate within 3 working days. Had she held a close ended scheme instead, she could not have come to the fund at all — she would have had to sell on the exchange at whatever price a buyer offered.
Why NISM asks about it
Chapter 8 (Basics of Mutual Funds) sets up the distinction in section 8.3 and Table 8.1, comparing unit capital, number of units, ongoing transactions and liquidity. Chapter 4 (Characteristics of Other Securities) repeats it in Table 4.1 against close ended funds and ETFs. Chapter 10 (Mutual Fund Products) defines the open ended fund in section 10.1.1, and Chapter 14 (Financial Transactions) supplies the redemption rules and the 3 percent exit load ceiling. Expect a comparison question — which structure has a changing unit capital, which one needs listing — and a calculation involving units and exit load.
Common exam traps
- Open ended means no maturity date, not "open to any investment strategy". The name is about the door, not the portfolio.
- Unit capital changes; it is not fixed. Fixed unit capital is the close ended feature.
- The liquidity provider is the fund, not the stock market — even though open ended units may also be transacted through stock exchange terminals.
- Transactions are at NAV-linked prices, never at a discount or premium set by the market.
- Re-opening is within 5 business days of allotment, not 5 days after the NFO opens.
- Redemption proceeds within 3 working days is the workbook's current figure, and it cites the SEBI circular of November 2022 that reduced it from 10 working days. The workbook itself advises reading the latest circular.
- The 3 percent exit load ceiling is on NAV and is specific to open ended schemes. Exit loads cannot differ by type of investor or transaction amount.
Where this is taught
- Series XIX-E · Chapter 6: Alternative Investment Fund Structuringintroduced here
- Series XXI-B · Chapter 6: Mutual Fundsintroduced here
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series II-A · Chapter 5: Basics of Mutual Fundsintroduced here
- Series II-B · Chapter 8: Basics of Mutual Fundsintroduced here
- Series XIX-B · Chapter 4: Category III AIF: Fund Structures and Service Providersintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series II-B · Chapter 10: Mutual Fund Products
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Close-ended fundA mutual fund scheme that sells units only in its NFO, runs for a fixed period and redeems all units at maturity — in between, investors can exit only by selling on the stock exchange, where listing is compulsory.
- Cut-off timeThe SEBI-prescribed clock time that, read together with the time stamp on the request, decides which day's NAV a mutual fund transaction is priced at.
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- Interval fundA scheme that is largely close-ended but opens for subscription and redemption during pre-specified transaction periods, with compulsory stock exchange listing to give an exit in between.
- New Fund OfferThe period in which a mutual fund scheme's units are offered to the public for the first time, at a fixed NFO price rather than at NAV, and during which the registrar builds the scheme's first register of investors.
- Unit capitalThe number of units a mutual fund scheme has issued multiplied by their face value — an accounting figure that records what investors contributed, not what their holding is worth today.
- Final CloseThe date that ends fund-raising for a Category III AIF scheme — after it, a close-ended scheme accepts no new investors, and only then may its units be listed.
- Index fundsA passive open ended scheme that replicates or tracks a specific index, investing at least 95 percent of total assets in that index's securities, bought and redeemed from the fund rather than on an exchange.
- Liquid assets requirementSEBI's rule that every open-ended debt scheme other than an Overnight, Liquid or Gilt fund must hold at least 10% of its net assets in cash, government securities, T-bills or repo on government securities.
- On-going offerThe continuous, post-NFO period in which an open-ended scheme sells and redeems units at NAV-linked prices on an ongoing basis — the pricing mechanism the workbook shows keeps every investor's holding fair.
- UnitThe share of a mutual fund scheme that an investor's money is translated into — typically carrying a face value of Rs 10, and worth whatever the scheme's NAV is on the day.
- Scheme Re-Opening DateThe date after an open-ended scheme's NFO from which investors can buy new units or sell units back to the scheme at NAV-based prices. Close-ended schemes have no re-opening date.