An open-end fund is a type of mutual fund that can have an infinite number of outstanding shares. This is because open-ended funds can always create new shares to sell to interested investors.
What is an open-end fund?
- Open-end funds can issue new shares to any investor who wants to purchase them.
- The price of an open-end fund is its NAV. Some funds may require a minimum investment amount.
- Open-end funds are not traded in the secondary market. Investors purchase and redeem shares directly with the fund company.
Investors can only obtain shares of an open-end fund directly from the fund company, as they are not traded on the secondary market. The fund company raises money by issuing new shares to investors. Fund companies can then reinvest those dollars into their managed funds.
However, if the fund receives more assets than they can effectively manage to meet their investment objectives, they may choose to close the fund to new investors. During these periods, no new shares will be issued to new investors. The fund may also prevent additional investment attempts by current shareholders. It will be up to the fund company if it chooses to reopen the fund at a later day.
The value of an open-end fund depends on its net asset value (NAV). NAV is the buy-in price for an investor to be issued a new share. As the underlying assets of the fund grow, so will the NAV of the fund. NAV is calculated after every market close. To turn a potential profit, investors can liquidate their shares by redeeming them to the fund company in exchange for the current NAV. Any capital gains made from a fund’s trading activity are passed onto investors as distributions.
Open-ended funds will also take a percentage of their NAV to fund their administrative costs, called the prospectus net expense ratio. Some funds may also require a minimum investment amount. Open-ended funds may have different management and investment strategies that will dictate a fund’s cost and underlying holdings.
Open-end funds are great investment vehicles for investors looking to add a managed and diverse set of assets to their portfolios.