What Is Open Ended Mutual Fund?

It acts as a diversified portfolio in which a group of investors with particular investment objectives pool their money to trade an infinite number of shares. It provides flexibility in terms of investment time and the amount and can issue or redeem shares all the time. The fund, however, does not trade in the open market and is priced daily, unlike the closed-ended fundClosed-ended FundA closed-end fund refers to a professionally managed fund whereby an investment company issues the initial public offering to raise capital. Later, these stocks are exchanged in the open market among the shareholders like other shares. Such investments provide better returns than the open-end funds.read more.

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Key Takeaways

  • An open ended mutual fund is a financial vehicle with a wide range of possibilities, allowing investors to invest, withdraw, or redeem their money at any time throughout the business day.It is priced daily depending on the net asset value (NAV) per share bought directly from the fund manager. This investment product is often ideal for individuals seeking high liquidity, portfolio diversification, and better returns. Unlike a closed ended fund, it does not trade on the exchange, has no restrictions on the number of shares or the amount that can be invested, has no maturity period, and can issue or redeem shares at any time.

Open Ended Mutual Fund Explained

An open ended mutual fund means investors can trade any number of shares for any sum continuously. It, thus, gives them the freedom to enter or exit the fund at any moment. Therefore, it is ideal for those seeking high liquidity, portfolio diversityPortfolio DiversityPortfolio diversification refers to the practice of investing in a different assets in order to maximize returns while minimizing risk. This way, the risk is kept to a minimal while the investor accumulates many assets. Investment diversification leads to a healthy portfolio.read more, and optimal profits. Moreover, the accessibility offered by this sort of fund lets investors invest, withdraw, redeem, or reinvestReinvestReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio.read more several times. Besides mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, exchange-traded and hedge funds are examples of it.

Instead of existing shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more (as in closed ended funds), open ended funds are controlled by the fund manager, from whom investors can purchase shares. There is no particular maturity period and can be subscribed to and repurchased at any time. Furthermore, there are no limitations on the number of shares a fund can issue to investors. Also, they can trade shares at NAVNAVNet Asset Value (NAV) refers to the net value of an entity or equity obtained by subtracting the total value of its assets from the total value of its liabilities. It also indicates the per share or unit market value of securities like mutual funds, exchange-traded funds (ETFs), indexes, etc., on a given day.read more of the fund’s underlying securities per share. The practice of pooling money in diverse assets, on the other hand, necessitates a large cash reserve from investors.

An open ended mutual fund is priced depending on the NAV of shares calculated daily. The NAV fluctuates every day due to changes in the price of shares, and so does the fund’s value. Therefore, investors only interested in liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more are more likely to invest in open ended funds. However, they may have to pay a fee for purchasing shares.

Money managers can evaluate the performance of these assets regularly and make well-informed investment decisions. In addition, the fund size increases when more units are sold than repurchased due to higher cash inflow and vice-versa. In short, the size of assets under management (AUM) expands or contracts depending on the number of investors that enter or exit.

Examples

Let us consider the following open ended mutual fund examples to understand the concept well:

Example #1

Investment Company A has three investors involved with an equal share of investments worth $1,500. This totals to an AUM worth $4,500 (I.e., 3x$1,500). Finally, a fourth investor joins and invests another $1,500, increasing the AUM to $6,000. 

Two investors decide to exit and sell their shares a couple of days later, reducing the AUM to $3,000. Though the total fund value decreases, there is no change in the holdings of the individual investors, and the NAV, too, is not affected by the exit or entry of an investor.

Example #2

Pros and Cons

An open ended mutual fund has multiple advantages, but they have some limitations that investors should know about. Here is a list of the pros and cons of open ended funds:

Pros

  • Managed by fund managers and professional analystsTracking historical performances helps in making informed investing decisionsHighly liquid and optimal returnsRequires low minimum initial investmentAssists investors in maintaining a diverse portfolio and hedgingHedgingHedge refers to an investment strategy that protects traders against potential losses due to unforeseen price fluctuations in an assetread more against risksTraded at any point in timeUnderlying securities and other systematic alternatives reduce unsystematic riskUnsystematic RiskUnsystematic risk refers to risk that is generated in a specific company or industry and may not be applicable to other industries or the economy as a whole.  There are two types of unsystematic risk: business risk and financial risk.read moreNo restrictions on the number of shares to be bought or sold or the amount to be invested

Cons

  • Priced daily based on the NAV per shareRequires high cash reservesLower returns on investmentFee and charges apply on purchasesInvestors may lose money due to significant cash inflows and outflows

Open Ended Fund Vs Closed Ended Fund

Open-ended and closed-ended funds are the two most common types of mutual fundsTypes Of Mutual FundsBalanced funds, Equity Funds, Fixed-income Funds, Index funds, Money Market Funds, Funds of Funds, Global Funds, and Specialty Funds are some of the different types of mutual funds available in the market.read more. Both financial instruments have similar properties, such as risk mitigation through portfolio diversificationPortfolio DiversificationPortfolio diversification refers to the practice of investing in a different assets in order to maximize returns while minimizing risk. This way, the risk is kept to a minimal while the investor accumulates many assets. Investment diversification leads to a healthy portfolio.read more and lower trading costs due to the pooling of funds. While the latter yields significant returns, the former’s accessibility, and security make it a preferable alternative.

Closed ended mutual funds are often confused with closed funds. However, closed funds are a type of open ended funds that restricts new investor participation at some time. The investment management or existing shareholders can opt to close new investor entry.

Besides the flexible terms with which these mutual fund options are available, let us look at a few more differences between them:

This has been a guide to Open Ended Mutual Fund and its Meaning. Here we discuss open ended mutual funds examples and their differences from closed ended funds, along with pros & cons. You can learn more from the following articles –

An open ended fund is a financial vehicle, allowing investors to invest, withdraw, or redeem their money at any time throughout the business day. It functions as a diversified portfolio in which a group of individuals with certain investment goals combines their funds to trade an unlimited number of shares. They can be subscribed to and repurchased, and there is no set maturity date. Furthermore, there are no constraints on the number of shares a fund can issue to investors.

The difference between the open ended and closed ended mutual funds include:

U.S. mutual funds, U.K. unit trusts, ETFs, hedge funds, European SICAVs, OEICs, etc., are some examples of open ended funds.

  • Index FundsSovereign Wealth FundTrust Fund