Open End Fund - Explained
What is an Open End Fund?
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Table of ContentsWhat is an Open-End Fund?How Does an Open-End Fund Work?Similarities and Differences Between Open-End and Closed-End FundsDifferences Advantages of Open-End Funds
What is an Open-End Fund?
A mutual fund that can issue an unlimited number of shares is called an Open-End Fund. Mutual Funds provide a convenient investment opportunity for investors as a majority of them are Open-End Funds. When the number of shares is too large to manage, the mutual funds issuing firm/management can decide to cap the limit. In extreme cases, existing investors can vote to close the fund to new investors.
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How Does an Open-End Fund Work?
Issuing unlimited number of bonds or stocks is the hallmark of an Open-End mutual fund. Buying these stocks increases their number while selling them deducts the value from circulation. Net Asset Value (NAV) is the price at which these shares are traded. This value is determined by the total value of the mutual funds underlying securities, summed up at the end of the trading day. When a large block of shares are cashed in by investors, capital is raised by selling some of the funds investments to pay off the investors. Investors looking to diversify their portfolio at a low risk in an easy way invest in such Open-End Mutual Funds with the aim of rapid growth or long term income. Open-End Funds are easily accessible owing to their low cost entry and negligible risks.
Similarities and Differences Between Open-End and Closed-End Funds
Both types of funds are operated by portfolio managers with the help of analysts. Both hold diverse investment portfolios that help in mitigating risks. Since the investment is pooled, both are easily accessible with low investment entries while maintaining low operational costs.
Closed-End Funds have a fixed number of shares that are issued via an IPO and traded in the public sphere, as opposed to the unlimited number of shares that can be issued in an Open-End Fund which aren't traded on a public exchange. Pricing structure of an Open-End fund is decided based on the NAV at the end of a trading day. Closed-End Funds prices fluctuate throughout the trading day based on the NAV value. Closed-End Funds are more liquid compared to Open-End Funds which cant be offloaded on the market. Closed-End Funds can invest in illiquid stocks like real estate, and create a more diverse portfolio as they aren't required to maintain cash reserves like Open-End Funds. Open-End Funds are low risk and low return. Closed-End Funds are slightly higher risk and provide much higher returns.
Advantages of Open-End Funds
Open-End funds are easy to buy in, low risk, require low investments, allow investors to have direct market participation without the needs of an intermediate broker. Selling prices mostly reflect the intrinsic value of the underlying assets. Open-End Funds are more widespread than Closed-End Funds, and used in most 401(k) plans in company sponsored retirement schemes to diversify the holdings portfolio.