What is an Open Ended Mutual Fund?
An open-ended mutual fund is the most common type of mutual fund available for investment. There are open-ended mutual funds and closed-ended (exchange traded) mutual funds. In an open-ended mutual fund, there is no limit to the number of investors, shares, or overall size of the fund, unless the fund manager decides to close the fund to new investors in order to keep it manageable. The value or share price of an open-ended mutual fund is determined at the market close every day and is called the Net Asset Value (NAV).
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Function
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Open-ended mutual funds are in high demand for many reasons. They are considered ideal retirement investments and are an easy tool for beginning investors to enter the market with little money and achieve diversification. An open-ended mutual fund purchases the shares of many different companies and pools all the shares. The fund then divides that pool among the investors in the fund according to the amount they have invested.
Types
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There are two types of mutual funds: open-ended and closed-ended. Closed-ended funds are also known as Exchange Traded Funds (ETF). Open-ended mutual funds have an unlimited number of shares available to purchase. The more money that is invested in an open-ended mutual fund, the more shares that are created. The share value of an open-ended mutual fund is always its Net Asset Value (NAV). A closed-ended mutual fund has a finite number of shares available and trades like a stock. It also has a NAV, but its individual share price may be higher or lower than its NAV on any given day.
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Identification
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Open-ended mutual funds will have a five-letter stock symbol and the share price will only be updated once daily when the NAV is calculated at the market close. Closed-ended mutual funds will have either three-letter or four-letter stock symbols depending on the exchange upon which they are listed. The NYSE and the AMEX use three-letter stock symbols and the NASDAQ uses four-letter stock symbols. Closed-ended mutual funds trade throughout regular market hours and the share price rises and falls based on the number of buyers relative to the number of sellers.
Benefits
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Open-ended mutual funds allow investors to target specific segments of the market (technology, medical, financial) without becoming experts in each individual company within those segments. The fund provides instant diversification among the chosen market sector. Shares can be purchased online, direct from the fund itself, through the mail, over the phone, or with a broker.
Expert Insight
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When investing in open-ended mutual funds, it is best to do so for the long term. Because of the diversification inherent in an open-ended mutual fund, market volatility is diluted and the benefits of trading in and out of a mutual fund like a stock is highly muted. Additionally, many mutual fund companies have placed curbs on high turnover trading within a given family of funds.
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