What is an Open-End Fund
An open-end fund is a type of mutual fund that does not have restrictions on the amount of shares the fund can issue. The majority of mutual funds are open-end, providing investors with a useful and convenient investing vehicle. When a fund's investment manager(s) determine that a fund's total assets have become too large to effectively execute its stated objective, the fund will be closed to new investors, and in extreme cases, will be closed to new investment by existing fund investors.
BREAKING DOWN Open-End Fund
An open-end fund is a mutual fund issuing unlimited shares of investments in stocks and/or bonds. Purchasing shares creates new ones, whereas selling shares takes them out of circulation. Shares are bought and sold on demand at their net asset value (NAV), which is based on the value of the fund’s underlying securities and is calculated at the end of the trading day. When a large number of shares are redeemed, the fund may sell some of its investments to pay the investor.
An open-end fund provides investors an easy, low-cost way to pool their money and purchase a diversified portfolio reflecting a specific investment objective, such as growth and income. Investors do not need a lot of money to gain entry into an open-end fund, making the fund easily accessible for investment.
Similarities and Differences Between Open- and Closed-end Funds
Both open- and closed-end funds are run by portfolio managers with help from analysts. Both types of funds mitigate security-specific risk by holding diversified investments, and by having lower investment and operating costs due to the pooling of investor funds.
However, an open-end fund has unlimited shares issued by the fund, whereas a closed-end fund has a fixed number of shares launched through an initial public offering (IPO) and sold on the open market. Open-end shares do not trade on an exchange, are less liquid, and are priced at the NAV at the trading day’s end. Closed-end shares trade on an exchange and are more liquid; prices trade at a significant discount or premium to the NAV based on supply and demand throughout the trading day.
Open-end funds must maintain cash reserves to meet redemptions. Since closed-end funds do not have that requirement, they may invest in illiquid stocks, securities or markets such as real estate. Closed-end funds may impose additional costs through wide bid-ask spreads for illiquid funds, and volatile premium/discount to NAV. Open-end funds typically provide more security, whereas closed-end funds often provide a bigger return.
Advantages of Open-end Funds
Open-end funds investors enjoy greater flexibility in buying and selling shares and allow investors to participate directly in the markets, whereas closed-end funds demand that shares be traded through a broker. Most of the time, investors can also receive the intrinsic value price for the underlying assets of the portfolio when selling. They are vastly more common than closed-end funds, and many individual investors have them included in their company-sponsored retirement plans, such as a 401(k).