Open-ended mutual fund

An open-ended mutual fund is a category of mutual fund scheme that, under the SEBI (Mutual Funds) Regulations, 1996, offers continuous subscription and continuous repurchase of units at the prevailing Net Asset Value (NAV), without any fixed maturity date. Regulation 2(s) defines an open-ended scheme as a scheme of a mutual fund that offers units for sale without specifying any duration for redemption. The scheme corpus is therefore variable, expanding with net inflows and contracting with net outflows.

Open-ended schemes are the dominant form of pooled retail investment in India. As of the financial year ended March 2025, they accounted for well over 95 per cent of total mutual fund industry AUM of approximately Rs 65 lakh crore, with close-ended and interval schemes occupying only a residual share. This concentration reflects the architecture put in place by the 1996 Regulations, the SEBI Scheme Categorisation Circular of October 2017, and the parallel rise of the Systematic Investment Plan as the dominant retail entry channel.

The open-ended form is distinguished from close-ended schemes, which raise a fixed corpus through a New Fund Offer (NFO), list units on a recognised stock exchange, and redeem only at a stated maturity date, and from interval schemes, which permit redemption only during specified transaction periods. The structure transfers daily-liquidity burden to the Asset Management Company (AMC), which must maintain sufficient cash, near-cash, and tradable securities to meet redemption requests within the timelines set by Regulation 53.

Definition under Indian regulation

Regulation 2(s) of the SEBI (Mutual Funds) Regulations, 1996, defines an open-ended scheme as a scheme of a mutual fund that offers units for sale without specifying any duration for redemption. The corresponding definition of a close-ended scheme appears in Regulation 2(d), referring to a scheme in which the period of maturity is specified. An interval scheme is defined in the SEBI Scheme Categorisation Circular of 6 October 2017 as a scheme whose units are made available for subscription and redemption during specified transaction periods at NAV-linked prices.

The operational obligation giving the open-ended form its identity is the requirement of continuous repurchase and resale. Regulation 33 prohibits the trustees from refusing repurchase requests in an open-ended scheme, except where, with prior SEBI approval and reasons recorded, repurchase is suspended for not more than 10 working days in any 12-month period in the interest of unit-holders. Regulation 53 places an outer time-limit of 10 working days from the redemption request for despatch of proceeds, with penal interest payable for any delay.

The legal personality of an Indian mutual fund is that of a trust established under the Indian Trusts Act, 1882, with a separate sponsor, trustee company, and AMC, all registered with SEBI under the parent SEBI Act, 1992. The trustees hold the scheme corpus on behalf of unit-holders; the AMC manages it under an investment management agreement. The day-to-day discharge of subscription and redemption obligations falls to the AMC and its Registrar and Transfer Agent (RTA), supervised by the trustees and by the SEBI Investment Management Department.

Operational mechanics

Subscription and redemption

A subscription is effected through a purchase application accompanied by payment instruction in favour of the scheme account. Once funds are realised by the cut-off time, units are allotted at the applicable NAV. A redemption is processed by the RTA against the unit-holder’s folio, with proceeds credited to the registered bank account by electronic transfer.

Both legs are NAV-linked, subject to exit load where applicable. Entry load was abolished by SEBI with effect from 1 August 2009. Exit load, if any, is deducted from redemption proceeds and is required by Regulation 51 to be credited back to the scheme, not retained by the AMC.

Daily NAV publication

Open-ended schemes compute and publish NAV on every business day, with methodology set out in Schedule VIII of the 1996 Regulations and the supporting valuation circulars (treated in detail in mutual fund NAV computation). NAV is uploaded to the AMFI NAV file maintained by the Association of Mutual Funds in India, the public-record source for all schemes.

The upload deadline is 11:00 p.m. on the same business day for most equity, debt, and hybrid schemes, and 9:00 a.m. on the next business day for fund-of-funds investing in overseas securities. Delays must be reported to AMFI and SEBI with explanations.

Cut-off times

The applicable NAV for a request depends on the time at which the request, together with funds in the case of purchases, is received by the AMC. The SEBI NAV applicability rule of February 2021 tightened the framework, requiring for all schemes other than liquid and overnight funds that the closing NAV of the day of realisation applies, irrespective of investment size.

A fuller treatment, including the next-day rule for instruments not received by close of banking hours, is provided in mutual fund cut-off times.

Settlement cycles

Redemption settlement varies by category. Liquid and overnight funds settle T+1. Equity-oriented schemes generally settle in T+1 to T+3 business days, with many AMCs moving to T+2 following the SEBI Master Circular update of 27 June 2024. Debt schemes other than liquid and overnight typically settle T+1 to T+2. The maximum permissible despatch period under Regulation 53 remains 10 working days in every case.

Switch, STP, and SWP mechanics

An open-ended scheme allows a unit-holder to switch from one scheme of the same AMC to another, including from regular to direct plan, through simultaneous redemption and subscription at the applicable NAVs. A switch is treated as a redemption for tax purposes and triggers capital-gains treatment in the source scheme. A Systematic Transfer Plan (STP) is a periodic switch of a fixed sum, typically from a liquid fund to an equity scheme. A Systematic Withdrawal Plan (SWP) is a periodic redemption of a fixed sum, typically used to generate post-retirement cash flow. All three (SIP, STP, SWP) presuppose continuous repurchase and are therefore available only on open-ended schemes.

Categories of open-ended schemes

The SEBI Scheme Rationalisation Circular of October 2017 categorised open-ended schemes into five broad groups, with a permitted structure of one scheme per category per AMC (with carve-outs for index funds, ETFs, and fund of funds). The framework standardises positioning, benchmark selection, and investor comparison.

Equity schemes

Eleven sub-categories are defined. Large-cap funds invest at least 80 per cent of total assets in equity of the top 100 companies by full market capitalisation (ranked by AMFI half-yearly). Mid-cap funds invest at least 65 per cent in companies ranked 101st to 250th. Small-cap funds invest at least 65 per cent in companies ranked 251st and beyond. Flexi-cap funds invest at least 65 per cent in equity without market-cap restriction; the category was created in November 2020 following the SEBI multi-cap reclassification, which had imposed a minimum 25 per cent allocation to each of large-, mid-, and small-cap in the multi-cap category. Other sub-categories include focused funds (maximum 30 stocks), ELSS, dividend-yield, value, contra, and sectoral or thematic funds (banking, technology, pharma, consumption, infrastructure, ESG).

Debt schemes

Sixteen sub-categories are classified by residual maturity and credit quality. Overnight funds invest in one-day securities; liquid funds in instruments up to 91 days. Ultra-short, low-duration, money market, short, medium, medium-to-long, and long-duration funds are defined by Macaulay duration bands ranging from three months to more than seven years. Dynamic bond funds invest across the duration spectrum. Corporate bond funds invest at least 80 per cent in the highest-rated corporate bonds; credit risk funds at least 65 per cent in bonds rated below the highest rating; banking and PSU funds at least 80 per cent in debt of banks, public-sector undertakings, public financial institutions, and municipal bonds. Gilt funds invest at least 80 per cent in central or state government securities; constant 10-year gilt funds maintain a portfolio Macaulay duration of approximately 10 years.

Hybrid schemes

Seven hybrid sub-categories are defined. Conservative hybrid funds invest 10 to 25 per cent in equity; balanced hybrid 40 to 60 per cent; aggressive hybrid 65 to 80 per cent. Dynamic asset allocation (balanced advantage) varies equity exposure between 0 and 100 per cent on a model basis. Multi-asset funds invest in at least three asset classes with a minimum of 10 per cent in each. Arbitrage funds invest at least 65 per cent in equity arbitrage, taking simultaneous long-cash and short-futures positions to lock in the cost-of-carry. Equity savings funds combine equity, arbitrage, and debt.

Solution-oriented and other schemes

Retirement and children’s funds carry a statutory lock-in of five years or the relevant retirement age or majority, whichever is earlier, and are usually structured as hybrid portfolios with a glide-path. Index funds and exchange traded funds (ETFs) replicate a stated index; ETFs trade on a stock exchange, with subscription and redemption in creation units by authorised participants. Fund of funds (FoFs) invest in units of other schemes, including domestic equity, debt, and overseas equity baskets, with overseas FoFs subject to the aggregate industry overseas-investment ceiling notified by SEBI.

Regulatory features specific to open-ended schemes

Continuous subscription

An NFO for an open-ended scheme is permitted to remain open for a maximum of 15 days. The scheme reopens for ongoing subscription and redemption within five business days of NFO closure. The continuous offer period has no statutory end-date; the scheme continues indefinitely unless wound up under Regulation 39.

Mandatory daily NAV and redemption window

Daily NAV publication is mandatory for every open-ended scheme; Regulation 25(15) and the Schedule VIII valuation framework prescribe inputs, while Regulation 48 imposes the disclosure obligation. Regulation 53 requires the AMC to despatch redemption proceeds within 10 working days, with default attracting penal interest at 15 per cent per annum (revised by circular from time to time) payable from the scheme account to the affected unit-holder.

Exit-load cap

Regulation 51 and the 2017 Categorisation Circular cap the exit load. Any exit load must be credited back to the scheme account net of applicable taxes; the AMC may not retain any part of it. Equity-oriented schemes typically charge 1 per cent if redeemed within 12 months. Liquid funds operate a graded structure, with redemption within seven days attracting a small load (0.0070 per cent on day one, scaling down to 0.0045 per cent on day six) introduced by SEBI in October 2019.

Side-pocketing and stress testing

The framework for side-pocketing in debt mutual funds, introduced in December 2018, permits segregation of a credit-impaired security from the main portfolio, with creation of separate illiquid units corresponding to the segregated asset. This prevents first-mover advantage in redemptions when a credit event affects a portion of the portfolio; trustees must approve segregation within one business day. The SEBI mutual-fund stress-testing framework of 2024 requires AMCs offering small-cap and mid-cap funds to publish monthly the estimated time required to liquidate 25 per cent and 50 per cent of the portfolio under stress, addressing concerns about the liquidity profile of these holdings relative to the open-ended redemption obligation.

Comparison with close-ended schemes

The open-ended and close-ended forms differ in liquidity, valuation, listing, and lock-in, although both are mutual fund schemes governed by the same parent regulations.

The close-ended form has receded since the late 2010s. Fixed Maturity Plans (FMPs), the principal close-ended debt product, lost their tax arbitrage following the 1 April 2023 amendment to debt fund taxation; close-ended equity schemes faded as flexible open-ended categories were rationalised. Close-ended schemes today represent a small residual share of industry AUM.

Taxation

Equity-oriented schemes

A scheme is treated as equity-oriented for tax purposes if it invests at least 65 per cent of net assets in domestic equity. Short-term capital gains under Section 111A, arising on units held for less than 12 months, are taxed at 20 per cent from 23 July 2024 (raised from 15 per cent). Long-term capital gains under Section 112A, on units held 12 months or more, are taxed at 12.5 per cent on aggregate gains exceeding Rs 1.25 lakh per financial year, with effect from the same date. The earlier 10 per cent rate on gains exceeding Rs 1 lakh, with grandfathering up to 31 January 2018, continues to apply to transactions before 23 July 2024. Securities Transaction Tax of 0.001 per cent applies on redemption. A consolidated treatment is given in equity mutual fund taxation in India.

Debt-oriented schemes

The Finance Act, 2023, with effect from 1 April 2023, amended Section 50AA so that gains on transfer of units of a specified mutual fund acquired on or after that date are treated as short-term capital gains regardless of holding period, taxed at the unit-holder’s slab rate. The amendment abolished the long-term capital gains category and the associated indexation benefit for new debt fund investments. Further detail is in debt mutual fund taxation 2023 and debt MF indexation removal in FY24.

Hybrid, stripping, and ELSS

A hybrid scheme’s tax treatment depends on equity exposure. Aggressive hybrid and equity-savings schemes (at least 65 per cent equity) are taxed as equity-oriented. Conservative hybrid schemes (10 to 25 per cent equity) are taxed as debt funds. Arbitrage funds, despite market-neutral exposure, are equity-oriented for tax provided they meet the 65 per cent threshold. Section 94(7) of the Income-tax Act, 1961, the dividend-stripping provision, disallows the short-term loss arising from purchase within three months before a dividend and sale within nine months after, to the extent of the dividend. Section 94(8) applies an analogous bonus-stripping rule. Investments in ELSS qualify for deduction under Section 80C up to an annual aggregate of Rs 1,50,000; ELSS units carry a three-year lock-in from each purchase date, so each SIP instalment unlocks independently.

Investor protection features

Portfolio disclosure and risk-o-meter

Liquid and overnight funds disclose their entire portfolio on the AMC website on a daily basis. Other open-ended schemes disclose fortnightly for liquid-like categories and monthly for others, with a half-yearly portfolio statement sent to unit-holders. Portfolio statements list security-level holdings, market value, percentage of net assets, and credit ratings for debt securities. Every open-ended scheme carries a risk-o-meter, a six-level pictorial indicator from Low to Very High, updated monthly based on portfolio composition; any change must be communicated to existing unit-holders.

Offer documents and trustee oversight

Each scheme is launched with a Scheme Information Document (SID), a Statement of Additional Information (SAI), and a Key Information Memorandum (KIM). The SID covers objectives, asset allocation, risk factors, and fees; the SAI covers AMC-level information including trustee composition, sponsor details, and historical performance; the KIM is a summary document accompanying the application form. Trustees are responsible under Regulation 18 for ensuring the AMC discharges its obligations, including periodic review of investment decisions, compliance audits, and approval of valuation policies. The sponsor, defined in Regulation 2(za), must have a sound track record and contribute a minimum net worth to the trustee company and the AMC; sponsor responsibility to unit-holders continues until SEBI is satisfied that an alternative sponsor is in place.

Operating cost structure

Regulation 52 sets out the maximum Total Expense Ratio (TER), on a sliding scale based on weekly average net assets. Equity-oriented schemes may charge up to 2.25 per cent on the first Rs 500 crore of AUM, declining in steps to 1.05 per cent above Rs 50,000 crore. Debt schemes range from 2.00 per cent on the first Rs 500 crore to 0.80 per cent above Rs 50,000 crore. Index funds and ETFs are subject to a separate, lower cap of 1.00 per cent. The detailed slab structure is in the TER of mutual funds in India article. Direct plans, mandated by SEBI from 1 January 2013, carry a lower TER than regular plans by excluding distributor commission, typically 50 to 100 basis points lower. Any change of 5 basis points or more must be communicated to investors through the AMC website, AMFI website, and RTA notification, taking effect prospectively.

Historical evolution in India

The first Indian mutual fund unit, US-64 of the Unit Trust of India, was launched in 1964 under the Unit Trust of India Act, 1963. It operated as an open-ended scheme in commercial intent, accepting subscriptions and offering repurchase, although without daily NAV; sale and repurchase prices were set administratively by the UTI board. The period from 1987 to 1993 saw the entry of public-sector AMCs sponsored by nationalised banks (SBI, Canbank, LIC, Indian Bank, Bank of India, GIC, PNB).

The current statutory framework dates from the SEBI (Mutual Funds) Regulations, 1996, which codified the open-ended structure with mandatory daily NAV, trustee responsibilities, and scheme-level investment restrictions. Private-sector AMCs entered in increasing numbers thereafter, and the open-ended form became standard. The collapse of UTI US-64 in 2001 prompted the legislative bifurcation of UTI into the Specified Undertaking of UTI and UTI Mutual Fund, the latter now operating under the 1996 Regulations like any other AMC. Post-2010 growth has been driven by the direct-plan mandate of 2013, the Scheme Rationalisation Circular of 2017, and the institutionalisation of SIP investing, which pushed monthly SIP inflows past Rs 20,000 crore by 2024. A fuller chronology is in the history of mutual funds in India.

Market scale and statistics

As of the financial year ended March 2025, total Indian mutual fund AUM was approximately Rs 65 lakh crore, with open-ended schemes accounting for over 95 per cent. Folios across all schemes exceeded 22 crore, of which approximately 17 crore were equity-oriented. Monthly SIP inflows had crossed Rs 20,000 crore, with active SIP accounts numbering over 8 crore. The market share by category was approximately 55 per cent equity, 25 per cent debt, 12 per cent hybrid, and the balance in index, ETF, FoF, and solution-oriented categories. A broader treatment is in the Indian mutual fund industry reference.

Criticism and trade-offs

Liquidity mismatch and the Franklin Templeton episode

The open-ended structure transfers liquidity risk from the unit-holder to the scheme. In normal conditions, the AMC meets redemptions from incoming subscriptions, cash balances, and liquidation of marketable securities. In stressed conditions, particularly in debt schemes holding less liquid corporate bonds, the obligation can exceed available liquidity. The Franklin Templeton winding-up of April 2020, in which six open-ended debt schemes with combined assets of approximately Rs 25,856 crore were wound up under Regulation 39 in response to COVID-19-induced redemption pressure on illiquid holdings, is the most prominent example. The episode prompted the SEBI side-pocketing framework, the stress-testing framework, and revised liquidity-buffer norms.

Concentration and transparency trade-offs

The expansion of small-cap fund AUM relative to the float-adjusted market capitalisation of the small-cap segment has prompted regulatory attention to tail-risk in the event of large-scale redemptions; the 2024 stress-testing disclosure regime addresses this, and some AMCs have restricted fresh inflows or limited lump-sum subscription while retaining SIP inflows. Frequent portfolio disclosure is intended to allow unit-holders to assess scheme positioning. Critics argue that it enables front-running by external participants, raising implementation cost; defenders point to AMC-level diversification and Regulation 25 limits as mitigants. The trade-off remains an active topic in the periodic review of disclosure rules.

See also

• SEBI (Mutual Funds) Regulations, 1996
• SEBI Scheme Rationalisation Circular 2017
• SEBI Investment Management Department
• Mutual fund NAV computation
• Mutual fund cut-off times
• Total Expense Ratio in Indian mutual funds
• Mutual fund risk-o-meter in India
• Side-pocketing in debt mutual funds
• Systematic Investment Plan
• Equity mutual fund taxation in India
• Debt mutual fund taxation 2023
• ELSS mutual funds in India
• Franklin Templeton winding-up 2020
• Indian mutual fund industry
• History of mutual funds in India
• AMFI, Association of Mutual Funds in India

References

1. SEBI (Mutual Funds) Regulations, 1996, Gazette of India Extraordinary, Part II, Section 3, 9 December 1996, as amended.
2. SEBI Categorisation and Rationalisation of Mutual Fund Schemes, Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, 6 October 2017.
3. SEBI Applicability of NAV, Circular SEBI/HO/IMD/DF2/CIR/P/2020/175, 17 September 2020 (effective February 2021).
4. SEBI Master Circular for Mutual Funds, SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/74, 19 May 2023, with amendments through 27 June 2024.
5. SEBI Circular on Segregated Portfolios, SEBI/HO/IMD/DF2/CIR/P/2018/160, 28 December 2018.
6. SEBI Circular on Stress Testing for Small-cap and Mid-cap Schemes, SEBI/HO/IMD/IMD-PoD/CIR/P/2024/27, 27 February 2024.
7. Finance Act, 2023 (Act No. 8 of 2023), amendments to Sections 50AA and 112A.
8. Finance (No. 2) Act, 2024 (Act No. 15 of 2024), amendments to Sections 111A and 112A.
9. SEBI Annual Report 2023 to 24, Mumbai, August 2024.
10. AMFI Monthly Industry Data, March 2025.
11. SEBI Order in re Franklin Templeton AMC, WTM/AB/IMD/IMD/11476/2021, 7 June 2021.
12. Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (Act No. 58 of 2002).