What Are Open-end Funds

Under the Investment Company Act of 1940 that regulates the structure and operations on investment companies by disclosing requirements and restrictions for their day-to-day operations and addresses issues of capital structure, investment activities and asset custody, investment companies can be open-end investment companies or closed-end investment companies.

Open-end investment companies, commonly known as mutual fund companies, can sell new shares continuously or redeem them from investors and deal directly with investors or brokers / dealers who receive a fee (sale load) for buying or selling the shares. They are called open-end because, unlike closed-end funds, the number of shares they can issue to new and old shareholders is unlimited. New funds can be added to the existing portfolio by any shareholder and new shares are issued to correspond to the amount of money paid. Similarly, the mutual fund can redeem or give investors the value of their shares, less any fees, upon their request. Therefore, the number of shares outstanding of an open-fund varies every day depending on the number of shares that is bought or redeemed by investors.

The Net Asset Value ( NAV ) of open-end funds is the share price at the end of each trading session and is calculated as the total market value of the portfolio assets minus liabilities, divided by the number of shares outstanding. The Net Asset Value is the value that investors pay to buy the fund plus the management fees. Most open-end funds are actively managed, which means that the management of the portfolio is handled by an investment management company that offers a variety of funds to investors.

The variety of open-end funds allows fund managers to appeal to many different investors with different investment profiles and risk/return preferences. Besides, open-end funds allow investors to switch among different funds of the same company when their financial conditions change to an extent that it affects their investment profile. For instance, based on the type of securities in which they invest in, open-end funds are categorized into stock funds, bonds funds, blended funds and money market funds.

On the other hand, a major disadvantage of open-end funds is that they require a lot of money to be managed because fund managers deal directly with investors, send them financial statements, and any type of information that is necessary so that investors make a well-informed investment decision. Besides, unlike closed-end funds, open-end funds need a lot of money to redeem their shares for investors who want to cash out their funds. This means that open-end funds need to have cash on hand to earn on prevailing interest rate or they have to sell securities to raise additional cash. However, this may generate additional transaction costs and taxes.

Sources:

http://thismatter.com/money/mutual-funds/mutual-funds.htm#tq8
http://beginnersinvest.about.com/cs/mutualfunds1/a/aa031501.htm