how an open end fund works
an open end fund issues shares if buyers want them it s always open to investment purchasing shares causes the fund to create new replacement shares while selling shares takes them out of circulation shares are bought and sold on demand at their nav the daily basis of the net asset value is on the value of the fund s underlying securities and is calculated at the end of the trading day for mutual funds if a large number of shares are redeemed the fund may sell some of its investments to pay the selling investors 1an open end fund provides investors with an easy low cost way to pool money and buy a diversified portfolio investment goals for open end funds include holding growth income large cap and small cap stocks among many others the funds can target specific industries or countries investors typically do not need a lot of money to gain entry into an open end fund occasionally when a fund s investment management determines that its total assets have become too large for its goals the fund is closed to new investors in rare cases the fund s investors instigate the move to be a closed end fund open end funds are so familiar virtually synonymous with mutual funds that many investors may not realize they are not the only type of fund in town that s because most mutual funds and etfs are open end though pooled investments were historically closed end until the 1970s 3difference from closed end fundsclosed end funds launch through an initial public offering and shares in them on exchanges they price trades at a discount or premium to the nav based on supply and demand throughout the trading day closed end funds cost more at times given wider bid ask spreads for illiquid funds occasional volatility means their price could be higher or lower than its nav would indicate closed end fund shares must be traded through a broker 4pros and cons of open end fundsboth open and closed end funds are run by portfolio managers with the help of analysts both types of funds mitigate security specific risk by holding diversified investments and having lower investment and operating costs because of the pooling of investor funds open end funds must maintain ample cash reserves to meet shareholder redemptions since these funds must be kept in reserve and not invested their yields can be lower all else being equal open end funds typically provide more security while closed end funds offer a bigger return because management must continually adjust holdings to meet investor demand the fees for these funds can be higher than those for other funds investors in open end funds enjoy greater flexibility in buying and selling shares since the sponsoring fund family always makes a market in them hold diversified portfolios lessening riskoffer professional money management