What is an Open-end Fund?

Key takeaways

• An open-end fund is the most common type of mutual fund.

• An open-end fund can be bought and sold at the net asset value.

• The key feature of an open-end fund is liquidity.

• An open-end fund is vulnerable to large inflows and outflows.

Understanding an open-end fund

An open-end fund (or an open-ended fund) is the most common type of mutual fund. As the name implies, an open-end fund doesn't have any inherent restriction on the number of outstanding shares, and it is open to investment and redemption at any time. The term contrasts with a closed-end fund, which is "closed" in the sense that once it raises capital via an initial public offering, no new money will flow into or out of the fund.

The open-end fund has many advantages: low cost, professional management, diversification, liquidity, and being well-regulated. The key feature of an open-end fund is liquidity. Investors can conveniently purchase and sell units on any trading day at the net asset value (NAV) of the fund, which is based on the value of the fund's underlying securities and is declared daily.

Every coin has two sides. "Opened" brings liquidity but also disadvantages. An open-end fund is vulnerable to large inflows and outflows. A sudden large redemption could force a fund manager to sell units at unfavorable prices, causing a loss to all investors in the scheme.