Definition
An Open Ended Mutual Fund is a type of investment fund that does not have a fixed number of shares, thus allowing new investors to join and existing ones to withdraw at any time. The fund issues new shares as investors buy in and redeems shares when investors sell out, with the price based on the fund’s net asset value. This characteristic offers investors high liquidity, but the fund’s value can fluctivate with the fund’s underlying securities.
Key Takeaways
- Open-ended mutual funds continuously create and redeem units, implying that the structure allows for purchasable and redeemable opportunities at the Net Asset Value (NAV) price based on supply and demand directly from the fund.
- The value of an open-ended mutual fund’s shares fluctuates with the market, as it’s based on the fund’s net asset value, which is determined at the end of each business day. No upper limit exists on the number of shares the fund can issue.
- Open-ended mutual funds offer high liquidity. Units can be bought and sold on any business day, providing investors the flexibility to conveniently adjust their investment portfolios.
Importance
An Open Ended Mutual Fund is an important financial instrument because it offers investors flexibility and continual ownership options.
Unlike closed-end funds which have a fixed number of shares, open-ended funds continually create new shares as more investors put their money into the fund, and similarly, shares are retired as investors redeem.
This enables investors to buy or sell shares at any time directly from the fund itself based on the current net asset value.
Furthermore, such funds often have a broad market and asset diversification, spreading the risk and creating the potential for steady income and capital appreciation.
Therefore, open-ended mutual funds can be significant for investors looking for liquidity, flexibility, and diversification in their investment portfolio.
Explanation
Open-ended mutual funds operate with the purpose of granting investors a convenient and affordable mechanism for diversification and professional asset management. Their primary function is to garner funds from a variety of investors and utilize these funds to compile a diversified portfolio of stocks, bonds, or other securities. These funds are managed by professional fund managers who make strategic investment decisions based on exhaustive research.
This essentially allows an investor to gain exposure to a diversified portfolio of securities with a relatively small amount of investment, thereby enhancing the risk-return tradeoff. Open-ended mutual funds are usually suitable for individuals who desire a low-cost diversified investment option without the need to constantly manage it. Furthermore, open-ended mutual funds are used for their liquidity feature.
These funds do not have a fixed number of shares; instead, they issue new shares whenever an investor chooses to buy and likewise redeem shares when an investor chooses to sell. This continuous creation and redemption of units provide investors with the flexibility to enter or exit a fund as per their financial needs and market vision. When an investor buys into the fund, more units are created, and when they sell, those units are eliminated.
This unique feature sets it apart from closed-ended funds and makes it an attractive investment option for many. Thus, these funds are used by investors who seek liquidity, diversification, and professional fund management in their investments.
Examples of Open Ended Mutual Fund
Vanguard 500 Index Fund: This is an open-ended mutual fund that aims to closely track the performance of the Standard & Poor’s 500 Index, a broadly diversifed index predominantly made up of stocks of large U.S. companies. Investors can buy or sell shares in the fund every business day, and there is no limit to the number of shares the fund can issue.
Fidelity Contrafund: One of the largest open-ended mutual funds, Fidelity Contrafund is known for its aggressive growth strategy. The fund management continuously issues additional shares to new investors, and purchases shares from investors who want to sell. The fund chiefly invests in common stocks and its investments are diversified over many different industries.
T. Rowe Price Equity Income Fund: This is another open-end mutual fund that seeks to provide a growing income stream and long-term capital growth by investing primarily in large-cap stocks with a record of paying dividends. Like both previously mentioned funds, T. Rowe Price Equity Income Fund allows investors to buy or sell shares every business day and the number of shares it can issue is limitless.
FAQs about Open Ended Mutual Fund
What is an Open Ended Mutual Fund?
An Open Ended Mutual Fund is an investment fund that allows investors to buy and sell shares at any time. These funds do not have a fixed number of shares available, and are constantly creating and restraining them as necessary to accommodate investor demand.
How does an Open Ended Mutual Fund work?
Open Ended Mutual Funds work by pooling money from multiple investors and investing it in a diversified portfolio of stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.
What are the benefits of investing in an Open Ended Mutual Fund?
There are several benefits of investing in an Open Ended Mutual Fund. These include: unlimited investment opportunities since the fund does not have a fixed number of shares; the flexibility to buy and sell shares anytime; professional management of the fund; and the ability to diversify your investment.
What are the risks associated with investing in Open Ended Mutual Funds?
Like any investment, Open Ended Mutual Funds come with risks. The price of the shares can fluctuate based on the performance of the underlying securities in the fund. Therefore, investors could lose money if the value of these securities decreases.
How can I invest in an Open Ended Mutual Fund?
You can invest in an Open Ended Mutual Fund by purchasing shares directly from the fund or through a broker. You will need to open an account, provide necessary identification documents, and decide how much you want to invest.
Related Entrepreneurship Terms
- Net Asset Value (NAV)
- Liquidity
- Redemption
- Investment Portfolio
- Diversification
Sources for More Information
- Investopedia: Investopedia is a leading source of financial content on the web, with more than 20 years of experience. The website provides detailed articles on a wide range of topics including Open Ended Mutual Fund.
- Moneycontrol: Moneycontrol is one of the leading financial platforms in India, providing data on everything finance-related, including terms like Open Ended Mutual Fund.
- CNBC: CNBC is a world leader in business news, financial market coverage, and personal finance information.
- Morningstar: With a primary focus on investments, Morningstar provides comprehensive information on everything from stocks and mutual funds to retirement planning.
