Open Ended Mutual Fund 2022 – Performance & Taxation of Open Ended Funds
Choice of investing in mutual fund schemes
Based on their structure, SEBI has classified mutual fund schemes into two types (open and close ended). This article will discuss open ended mutual fund schemes, their performance, and taxation.
What is an open ended mutual fund?
An open ended scheme is open for subscription and redemption of units at all times. An investor can approach the fund house at any time and purchase any number of scheme units. The investor can purchase the scheme units by paying a lump sum or using systematic plans such as systematic investment plan (SIP) or systematic transfer plan (STP).
Similarly, for redemption, the investor can approach the fund house at any time and redeem any number of units held at the net asset value that is declared at the end of every trading day. The investor can redeem the open end scheme units in a lump sum or use a systematic plan such as a systematic withdrawal plan (SWP).
Open end funds are so common that people use the term interchangeably with mutual fund schemes.
How do open ended funds work?
An open ended scheme collects money from investors and invests it in various securities on their behalf. The investments are made based on the scheme's objectives. All unitholders are allotted scheme units in proportion to their investment. The scheme's net asset value (NAV) is calculated and declared at the end of every trading day.
The NAV fluctuates based on the price movement (up or down) of the securities held in the scheme portfolio. The investor’s profit/loss depends on the movement of the NAV up/down from the investor’s purchase price.
The units of an open ended scheme cannot be traded on the stock exchange during trading hours. All transactions happen at the NAV that is declared by the fund house. All investors get the same NAV, whether for purchase or redemption, for transactions done on a particular day.
Who should invest in open ended funds?
Mutual fund houses offer open ended schemes for investors of all types.
Investors with an aggressive risk profile: Mutual fund houses offer equity open ended schemes for investors with an aggressive risk profile. The equity open ended scheme sub-categories can include multi-cap funds, large-cap funds, mid-cap funds, small-cap funds, focussed funds, sectoral funds, thematic funds, equity-linked saving schemes (ELSS), etc.
Investors with a moderate risk profile: Mutual fund houses offer hybrid open ended schemes for investors with a moderate risk profile. The hybrid open ended scheme sub-categories can include conservative hybrid funds, balanced hybrid funds, aggressive hybrid funds, dynamic asset allocation or balanced advantage funds, multi-asset allocation funds, arbitrage funds, equity savings funds, etc.
- Investors with a conservative risk profile: Mutual fund houses offer debt open ended schemes for investors with a conservative risk profile. The debt open ended scheme sub-categories can include overnight funds, liquid funds, ultra-short duration funds, low duration funds, money market funds, short-duration funds, medium duration funds, long-duration funds, dynamic bond funds, corporate bond funds, banking and PSU funds, gilt funds, floater funds, etc.
Open ended fund returns
As discussed in the earlier section, mutual fund houses offer various open ended schemes with sub-categories in each category. It will not be possible to discuss the returns of each sub-category, and hence, we will focus only on one sub-category (ELSS funds) in this article.
ELSS open ended scheme returns
|Scheme name||AUM (Rs. crores)||1-year||3-years||5-years|
|Quant Tax Plan||554||62.49%||37.75%||27.42%|
|BOI AXA Tax Advantage Fund||516||40.66%||30.95%||24.04%|
|Mirae Asset Tax Saver Fund||10,086||37.11%||26.51%||23.93%|
|Canara Robeco Equity Tax Saver||2,857||34.92%||26.17%||22.14%|
|IDFC Tax Advantage (ELSS) Fund||3,355||48.72%||24.73%||21.54%|
Note: The returns are as of 7th January 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year returns.
As seen in the above table, the top five ELSS funds have given good returns in the range of 21-27% CAGR over the last five-year period.
Taxability of open ended funds
For taxation purposes, a mutual fund (open end) is categorised into two:
- Equity funds: An open ended fund where equity holdings are always 65% or higher of the total assets.
- Debt funds: Any open ended fund that is not an equity fund is taxed like a debt fund
Taxation of open ended equity funds: If you sell your equity mutual fund units before 12 months, the capital gain will be classified as short-term capital gain (STCG). The STCG will be taxed at 15%. If you sell your equity mutual fund units after 12 months, the capital gain will be classified as long-term capital gain (LTCG). The LTCG of up to Rs. 1 lakh in a year will be exempt. The incremental LTCG above Rs. 1 lakh in a year will be taxed at 10% without indexation benefit.
Taxation of open ended debt funds: If you sell your debt mutual fund units before 36 months, the capital gain will be classified as short-term capital gain (STCG). The STCG will be added to your overall income and taxed based on your income slab. If you sell your debt mutual fund units after 36 months, the capital gain will be classified as long-term capital gain (LTCG). The LTCG will be taxed at 20% with indexation benefit or 10% without indexation benefit.
How to invest in open ended funds with Glide Invest
While investing through the Glide Invest App, you will have to take the following steps:
- Specify your financial goal, for example, retirement planning
- The amount you wish to accumulate for the financial goal
- The number of years in which you have to achieve the financial goal
- The amount by which you will increase your SIP every year
The platform will recommend three investment portfolios based on the above inputs: aggressive, conservative, and balanced. Once you select an investment portfolio, you will see the specific open-ended mutual fund schemes recommended for investment. The platform will recommend open-ended funds for investment based on asset allocation.
Mutual fund houses provide you with various open ended mutual fund schemes across equity, debt, and hybrid categories. With open ended funds, you get liquidity wherein you can buy the units from the fund house at any time at the NAV. Similarly, you can sell the units back to the fund house at any time at the NAV. Open ended funds can be an excellent investment vehicle to achieve your financial goals.
To start investing in open ended mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.